November 28, 2025

SEP IRA vs. SIMPLE IRA: Two Great Plans We Overthink Every Day

One of these plans costs way less to maintain, but most business owners pick the wrong one anyway.

By Dan Cashion • 8-year retirement specialist, Charles Schwab & TD Ameritrade

Two kinds of small-business plans cause the most confusion:
SEPs and SIMPLEs.
Both are good. Neither is complicated. Yet somehow, every week, someone accidentally turns a straightforward conversation into a three-act drama.

This Knowledge Blast gives you the fast, practical suitability guide — minus the drama.

Summary

SEP = employer-funded, flexible, great for owner-only or small-employee groups.
SIMPLE = employee deferrals + employer contributions, inexpensive, and made for small businesses that want an easy plan.

What Small Business Owners Should Know

SEP IRA = employer contributes. Employees do not.

Employer-only.
No salary deferrals.
Huge contribution potential.
Perfect for owner-only businesses and sole proprietors.

SIMPLE IRA = employees contribute + employer must contribute.

Two choices:

3% match, or

2% non-elective

Low cost. Structured. Predictable.

When a SEP Makes Sense

A SEP is the right fit when the business:

Has no employees (or very few)

Wants flexibility

Wants high contribution potential

Doesn't want to commit to mandatory contributions

Wants the easiest plan on earth to run

SEPs are the golden retrievers of retirement plans: loyal, simple, and impossible to misunderstand — unless you really try.

When a SIMPLE Makes Sense

A SIMPLE IRA is ideal for businesses that:

Have up to 100 employees

Want employees to save for retirement

Can handle a required annual contribution

Want something cheaper than a 401(k)

Need a plan that's easy to onboard new hires into

SIMPLEs were built for real-world small businesses, not theory.

Common Questions

"Can we have both a SEP and a SIMPLE?"

No.
This is not Pokémon. You don't collect them.

"Can I skip the SIMPLE match this year?"

Also no.
The "M" in SIMPLE stands for Match — the IRS was not subtle.

"I'm a sole proprietor. Should I use a SIMPLE?"

Who are you matching? Yourself?
Get a SEP or Solo(k).

"Which plan lets me contribute the most?"

Usually SEP → unless the owner wants salary deferrals too.
Then the answer becomes Solo(k).

How to Explain the Difference to Clients

SEP IRA:

"This is the plan where the employer handles everything and employees just quietly enjoy free money."

SIMPLE IRA:

"This is the plan where employees can contribute, the employer contributes too, and nobody needs to hire a third-party administrator."

Suitability at a Glance

Best for: 1–2 person businesses

→ SEP or Solo 401(k)

Best for: Companies with multiple employees

→ SIMPLE IRA
(unless they want high-level customization → 401(k))

Best for: Maximum employer flexibility

→ SEP

Best for: Employees who actually want to save

→ SIMPLE

Myths to Clear Up

Myth 1: SIMPLE IRAs are "cheaper" than SEPs.
Not really. Both are cheap. SIMPLE just has more rules.

Myth 2: You can switch at any time.
SIMPLE has strict adoption and termination windows (for example, the two-year holding period).
SEP does not.

Myth 3: SEP allows catch-ups.
It does not.
SEP contributions are employer-only.

Bottom Line

If reps focus on:

Employee count

Flexibility needs

Contribution goals

…they'll choose the right plan almost every time.

These two plans aren't complicated.
People just make them complicated.

Frequently Asked Questions

What's the main difference between a SEP IRA and SIMPLE IRA?

SEP IRAs are funded only by the employer with no employee contributions, while SIMPLE IRAs allow employees to contribute their own money and require the employer to contribute either a 3% match or 2% non-elective contribution. SEPs offer more flexibility and higher contribution potential, while SIMPLEs are structured for businesses that want employees to actively save for retirement.

Which plan is better for a solo business owner with no employees?

A SEP IRA is typically better for owner-only businesses or sole proprietors. It offers huge contribution potential, complete flexibility, no mandatory contributions, and is extremely easy to run. Since there are no employees, you don't need the employee deferral features that a SIMPLE IRA provides.

Can I contribute my own salary to a SEP IRA like I would to a 401k?

No, SEP IRAs do not allow employee salary deferrals. Only the employer can make contributions to a SEP IRA. If you want to make your own contributions from your paycheck, you'd need a SIMPLE IRA or a different type of retirement plan.

What are the employer contribution requirements for each plan?

SEP IRAs have no mandatory employer contribution requirements - you contribute when and how much you want. SIMPLE IRAs require employers to contribute either a matching contribution of up to 3% of employee compensation or a non-elective contribution of 2% for all eligible employees.