SEP IRA and SIMPLE IRA: Retirement Plans for the Self-Employed and Small Businesses

If you are self-employed or run a small business, you do not have an employer's 401(k). But you can open your own retirement plan, and two of them are simple enough to set up in an afternoon: the SEP IRA and the SIMPLE IRA. Both give you a tax deduction today and let your money grow untaxed. They differ in who pays in, how much, and which rules apply to your employees. This guide explains both, and when a solo 401(k) is the better choice. All figures are for 2026.

The short version

How a SEP IRA works

A SEP (Simplified Employee Pension) is a traditional IRA that the employer pays into. There is no plan to run and no yearly filing with the IRS: you sign a short form (Form 5305-SEP), open a SEP IRA at a broker, and pay in when you want.

Who pays in

Only the employer. If you are self-employed, you are the employer. Employees cannot put part of their salary into a SEP. If you have employees who meet the plan's conditions, you must pay in the same percentage of pay for each of them as for yourself. This is why a SEP suits a one-person business best: with employees, it can become expensive.

How much

The limit is 25% of each employee's pay, up to $72,000 in 2026. For a self-employed person, the calculation is circular, and the result is about 20% of your net earnings from self-employment (your profit minus half of your self-employment tax). For example, with $100,000 of net self-employment earnings after that adjustment, you can pay in about $20,000. IRS Publication 560 has the worksheet.

You choose the amount each year, and you can pay in nothing in a bad year. You can also pay in until your tax filing deadline, including extensions, so you can decide after you know your profit.

The SEP limit is separate from your personal IRA limit. You can fill a SEP IRA and also pay $7,500 into a Roth IRA or a traditional IRA in the same year.

Everything else

A SEP IRA follows the traditional IRA rules: no tax while the money stays in, ordinary income when it comes out, a 10% additional tax before 59½ unless an exception applies, and minimum distributions from 73. Since SECURE 2.0, the law also allows Roth SEP contributions, but not every broker offers them yet.

One warning for higher earners: the money in a SEP IRA counts in the pro-rata rule of the backdoor Roth, like a traditional IRA.

How a SIMPLE IRA works

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is a small-business plan where employees pay in from their salary, like in a 401(k), but with lighter rules and lower limits. The employer cannot run another retirement plan at the same time.

Who pays in

• Employees choose a part of their salary, up to $17,000 in 2026. From age 50 they can add $4,000, and at ages 60 to 63, $5,250 in place of the $4,000. Some plans of very small employers have slightly higher limits.
• The employer must pay in every year, with one of two formulas: match each employee's contributions dollar for dollar up to 3% of pay, or pay 2% of pay for every eligible employee, even those who pay in nothing.

If you are self-employed with no employees, you are both the employee and the employer, so you can pay in both parts.

The two-year rule

In the first two years after you join a SIMPLE IRA, the early-withdrawal tax is 25%, not 10%. During those two years, you can also move the money only to another SIMPLE IRA. After two years, the normal traditional IRA rules apply. The rules are on the IRS page on exceptions to the tax on early distributions.

And the solo 401(k)?

If you are self-employed with no employees (a spouse who works in the business can join), a solo 401(k) often lets you save more than a SEP at the same income, because you pay in twice:

• as the employee: up to $24,500 of your earnings, plus the catch-ups from 50;
• as the employer: up to 20% of your net self-employment earnings;
• a total of up to $72,000, before the catch-ups.

On a $60,000 profit, a SEP allows about $11,000. A solo 401(k) allows the same $11,000 as the employer, plus $24,500 as the employee. A solo 401(k) can also have a Roth side and can allow loans. The cost: more paperwork, and once the plan holds more than $250,000, a yearly Form 5500-EZ.

Foreign withholding inside the plans

One cost the plans cannot remove: tax that a foreign country withholds on its dividends. A SEP or SIMPLE IRA pays no US tax on that income, so it cannot claim a foreign tax credit, and that withholding is lost for good. Canada is the exception, because the US-Canada tax treaty exempts these retirement accounts from Canadian withholding on dividends. Read more in what is dividend withholding tax.

Track your SEP or SIMPLE IRA with the rest of your portfolio in Cadances

A self-employed person often has a SEP or SIMPLE IRA, a Roth IRA, an old 401(k) from a former job and a taxable brokerage account. Cadances is a portfolio tracker: it puts all of them in one place and gives you one total, one allocation and one performance figure.

• An account type priced the way the law prices it. On the Portfolios screen, the SEP IRA and the SIMPLE IRA are their own account types, next to the traditional and Roth IRAs, the 401(k) and your taxable accounts. Dividends and gains inside them show as untaxed, so your income forecast is not cut by a tax you do not pay yet.
• The tax bill you are deferring, made visible. For US residents, the Tax screen shows the 2026 limit of each account, tells you that the SEP limit is separate from your personal IRA limit, and reminds you that the pay test can make your own limit lower. It prices what a full withdrawal today would cost at your ordinary bracket. Past 73 it reminds you of the minimum distribution.
• All your brokers in one place. Import the export file from your broker, or add your holdings by hand. Your SEP IRA, your Roth IRA and your taxable account sit in the same view.
• Performance and allocation. On Performance, compare each account with the S&P 500 over the window you pick. Set allocation rules on each portfolio and see when your mix drifts away from your target.

Two limits to keep in mind: Cadances does not know your pay or your business profit, so it shows the SEP ceiling of $72,000 and tells you that the 25% test applies, but it does not work out your own limit. And for a SIMPLE IRA, it prices an early withdrawal with the usual 10%, because it does not know when you joined the plan. In your first two years, the rate is 25%.

Start free. Create your Cadances account: no card, no time limit. The Free plan holds one portfolio of up to 15 holdings, which is enough for one account. To track your SEP IRA, your Roth IRA and your taxable account side by side, compare the paid plans.

The bottom line

• A SEP IRA is funded by the employer only: up to 25% of pay, or about 20% of net self-employment earnings, up to $72,000 in 2026.
• A SIMPLE IRA takes $17,000 of salary, plus a required employer match of 3% or 2% for everyone.
• Both follow the traditional IRA rules, with a 25% early-withdrawal tax in the first two years of a SIMPLE.
• A SEP limit is separate from your personal IRA limit.
• If you have no employees, compare with a solo 401(k), which often allows more on a smaller income.

Each payment is dollar-cost averaging by design, and a diversified mix inside the account matters as much as the amount you put in.

This article is general information, not tax or legal advice. Your own situation decides which rules apply to you.