Part of our 2026 Retirement Planning Series
In our last IRA-focused article, we tackled Traditional vs. Roth IRAs for individual savers. Now we’re following up with a look at two retirement plans tailored for business owners and self-employed professionals: SEP IRAs and SIMPLE IRAs. These plans are especially relevant if you’re a solo entrepreneur or run a small company. In this Sarasota-flavored guide, we’ll explain how each plan works, the updated contribution rules for 2026, and strategic implications for choosing and using a SEP or SIMPLE IRA.
Both plans offer tax advantages and relatively low administrative hassle, but they serve different needs. Let’s review the key features, who each plan suits best, and what changes in 2026 could mean for your retirement strategy.
How SEP IRAs Work (2026 Rules and Updates)
A Simplified Employee Pension (SEP) IRA is essentially a traditional IRA that an employer (or self-employed person) funds on a pre-tax basis for themselves and any eligible employees. SEP IRAs are favored by many small businesses because they’re easy to set up and maintain. There’s no complex annual testing or filing, and costs are minimal, and function like a cross between a traditional IRA and a mini-401(k): contributions are tax-deductible and grow tax-deferred, and the contribution limits are much higher than a standard IRA.
Contribution Limits
For 2026, a business owner can contribute up to 25% of an eligible employee’s compensation, capped at $72,000 for the year. (This is a slight increase from a $70,000 cap in 2025.) Note that for a self-employed person, “25% of compensation” works out to roughly 20% of net business earnings due to how the calculation is done, which is still a very high limit. Unlike other plans, SEP IRAs do not have a special catch-up contribution for owners age 50+; however, if you’re eligible, you can still contribute to a personal traditional or Roth IRA (up to $7,500 plus a $1,100 catch-up in 2026) on top of your SEP IRA funding. All SEP contributions are pre-tax (deductible to the business), though recent law changes now allow an optional Roth treatment (more on that later).
Who Contributes
Only the employer contributes to a SEP IRA. Employees themselves cannot defer salary into a SEP the way they might in a 401(k) or SIMPLE IRA. If you’re self-employed, you’re effectively both employer and employee, so you’ll be funding your own SEP IRA from the business. Importantly, if you do have other employees, the same percentage of pay must be contributed for each eligible employee as you contribute for yourself. For example, if as owner you contribute 10% of your compensation to your own SEP, you must also contribute 10% of each eligible worker’s pay to their SEP IRAs in that year. Additionally, you have the flexibility to decide how much to contribute each year, anywhere from 0% to 25% of pay. In fact, you can skip employer contributions entirely in a lean year if needed (a key advantage for businesses with variable profits).
Eligibility and Setup
SEP IRAs have minimal paperwork. It usually consists of just a simple one-page agreement and setting up IRA accounts for each participant. Employers can set basic eligibility requirements for employees, but they can’t be more restrictive than IRS limits. By default, an employee must be 21 or older, have worked for you in at least 3 of the last 5 years, and have earned at least a minimum amount (e.g. $750 in 2025, indexed to about $800 in 2026). You can choose to be more inclusive (e.g. lowering the age or service requirement), but you can’t require more years or a higher earnings threshold than the law allows.
If you’re a self-employed solo proprietor, you obviously qualify to contribute for yourself. Contributions are due by your tax filing deadline (including extensions), meaning you can set up and fund a SEP for 2026 as late as April (or October with extension) of 2027, which is a nice last-minute planning option if you find you have extra cash or need a deduction.
2026 Updates for SEP IRAs
Aside from the contribution limit rising to $72k, another notable recent change is that SECURE Act 2.0 allows SEP IRAs to offer Roth contributions (previously, all SEP contributions were pre-tax only). In practice, since SEP contributions are employer dollars, a “Roth SEP” means you would include that contribution in the employee’s taxable income and deposit it into a Roth IRA. This feature is optional and still rolling out – many providers and businesses haven’t implemented Roth SEP contributions yet. But it’s an intriguing option for the future: it could let a high-income owner intentionally fund a Roth through their SEP (trading the current deduction for future tax-free growth). For now, the vast majority of SEP IRA contributions will continue to be pre-tax.
Who Does a SEP IRA Suit Best?
A SEP IRA tends to work best for self-employed individuals or small family businesses. If you have no full-time staff other than yourself (and perhaps a spouse), a SEP allows you to maximize retirement contributions in a big way, potentially $72k a year, far exceeding the standard IRA limit. This is great for high-income consultants, freelancers, doctors with side practices, etc., who want to shelter a lot of income for retirement.
The SEP is also extremely easy to maintain. For example, John, a 55-year-old consultant in Sarasota with no employees, can still shelter a meaningful amount in a SEP IRA, though the exact math depends on how he’s taxed. If John is a sole proprietor with $200,000 of net profit, the SEP formula uses “net earnings from self-employment” (after the deduction for half of self-employment tax), so the maximum SEP contribution typically works out to roughly 20% of that base, often landing closer to the high-$30k/low-$40k range in this scenario, well below the $72,000 cap for 2026.
If John instead runs an S-corp and pays himself $200,000 in W-2 wages, then a 25% SEP contribution could be $50,000. Either way, SEP funding is flexible year to year and can generally be made by the tax filing deadline (including extensions).
On the other hand, businesses with several employees may find a SEP more challenging, because if you contribute for yourself, you must contribute for everyone at the same rate.
For instance, Lisa owns a small design firm with 5 employees. If she wants to put $30,000 into her own SEP this year (say 15% of her pay), she’d be on the hook to contribute 15% of each employee’s salary to their SEPs as well. That can add up quickly and may not be financially feasible every year. In such cases, a SIMPLE IRA or even a 401(k) might be more appropriate.
How SIMPLE IRAs Work (2026 Rules and Updates)
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a tax-deferred retirement plan for small businesses (up to 100 employees) that’s designed to be “simpler” than a 401(k) yet still encourage employees to save. In a SIMPLE IRA, employees can contribute part of their pay to their own IRA, and the employer must provide a matching or fixed contribution each year. In effect, it’s like a lighter version of a 401(k) plan, but with lower limits and, importantly, less complexity.
Contribution Limits
The SIMPLE IRA employee deferral limit for 2026 is $17,000 (up from $16,500 in 2025). This is the maximum an employee under age 50 can contribute from salary for the year. On top of that, individuals age 50 and older can make catch-up contributions. Under SECURE 2.0’s indexed rules for 2026, employees ages 50–59 (and age 64+) may contribute an additional $4,000, bringing their total to $21,000, while those ages 60–63 are eligible for a larger “super” catch-up of $5,250, for a total of $22,250.
SECURE 2.0 also introduced higher SIMPLE IRA limits for certain “applicable SIMPLE plans.” In 2026, these plans allow a higher base deferral limit of $18,100 (instead of $17,000). In applicable plans, the age 50+ catch-up is $3,850 (instead of $4,000), while the age 60–63 catch-up remains $5,250.
For eligible employers with 25 or fewer employees, these higher SIMPLE limits generally apply automatically. Employers with more than 25 employees may still adopt the higher limits, but only if they affirmatively elect them and agree to increased employer contributions, either a matching contribution of up to 4% of compensation (instead of 3%) or a 3% nonelective contribution (instead of 2%), as permitted under SECURE 2.0.
The intent behind these rules is to encourage small employers to offer more generous retirement benefits while giving larger employers flexibility to opt in if they are willing to increase their own contributions.
Employer Contributions
Every SIMPLE IRA plan requires employer funding each year – unlike a SEP, the employer cannot skip years without contributions (short of terminating the plan). Employers have two choices for how to contribute:
Employer Contribution Options
Matching Contribution
Match each employee's salary deferrals dollar for dollar, up to 3% of their compensation.
You can match as low as 1% in two out of five years, but 3% is the standard maximum.
Nonelective Contribution
Contribute 2% of each eligible employee's compensation — regardless of whether they contribute themselves.
Either way, the employer is obligated to put in money each year for employees. Most choose the match formula because it encourages employees to contribute their own money. For example, if an employee making $50,000 opts to defer 5% ($2,500) into the SIMPLE, the employer would contribute an additional $1,500 (3% of $50k) on their behalf. If the employee contributes nothing, the employer doesn’t have to either under the match option.
Under the 2% nonelective formula, that same employee would get $1,000 from the employer (2% of $50k) no matter what. Business owners can decide annually which method to use (match vs. 2%), as long as they notify employees before the start of the year and adhere to IRS rules. There is also a new SECURE 2.0 provision allowing an additional 10% nonelective contribution (up to $5,000 max) if the employer really wants to be generous, but this is optional and not common for most plans.
Who Contributes
Unlike a SEP, a SIMPLE IRA involves both parties contributing: the employee defers a portion of their salary (pre-tax, via payroll deduction) and the employer adds either a match or nonelective contribution. All contributions go into each employee’s SIMPLE IRA account (which is basically a traditional IRA in their name). Contributions are immediately 100% vested. Employees can choose their investments in the IRA, just like any personal IRA.
Eligibility and Setup
A business can establish a SIMPLE IRA plan if it has 100 or fewer employees and no other retirement plan (no other 401k, SEP, etc., with limited exceptions). Self-employed individuals with no employees can also open a SIMPLE IRA for themselves, though often a SEP or solo 401(k) might allow higher savings in that scenario. To participate, an employee must have earned at least $5,000 in any 2 prior years, and be expected to earn at least $5,000 in the current year. (Employers can set the bar lower if they want, but not higher, so many plans essentially cover any employee earning $5k+ in a couple of years.) This rule is to ensure very short-term or part-time workers can be excluded if their income is minimal.
A SIMPLE IRA is easy to set up. You fill out a plan document (IRS Form 5304-SIMPLE or 5305-SIMPLE) and have each employee open a SIMPLE IRA account at a financial institution. You must give employees an annual notice (usually in the fall) about the plan and their right to contribute, and whether you’ll do a match or 2% contribution. One important rule: if you want to start a new SIMPLE IRA plan for your business, you have to establish it by October 1st of that year. If you miss that deadline, you have to wait until the next calendar year, whereas a SEP could still be done after year-end.
Withdrawals, Special Rules & Roth
Money in a SIMPLE IRA grows tax-deferred and withdrawals are taxed as income, like other pre-tax retirement accounts. One special caveat: if an employee withdraws money from a SIMPLE IRA in the first two years of participation, the usual 10% early withdrawal penalty is increased to 25%. This two-year rule also means you cannot roll over (transfer) funds from a SIMPLE IRA to another retirement account (like a traditional IRA or Roth IRA) until you’ve been in the plan for at least 2 years. These rules are meant to prevent quick in-and-out of SIMPLE IRAs. After two years, SIMPLE assets can be rolled over or converted like any IRA.
As of 2024, SECURE 2.0 now permits Roth contributions in SIMPLE IRAs as well. This means employers can allow employees to designate their salary deferrals as Roth (after-tax) and even have employer contributions go into a Roth SIMPLE IRA. However, similar to SEP, this feature is optional and requires the financial institution’s support. If offered, any Roth contributions would be included in the employee’s income (no tax deduction) and then grow tax-free. Employers and employees would need to coordinate this election before contributions are made.
Who Does a SIMPLE IRA Suit Best?
SIMPLE IRAs are generally best for small businesses with a few to a few dozen employees, especially when the owner wants to encourage employee saving but can’t commit to the higher cost or complexity of a 401(k). A SIMPLE works well if your business has modest profits such that the lower contribution limits are sufficient and the required employer contributions are affordable.
For example, Robert owns a local landscaping company with 10 employees, most of whom are part-time or seasonal. A 401(k) plan would be overkill for his company (too expensive to administer). Bob sets up a SIMPLE IRA so that he and his workers can contribute towards retirement. His employees like it because it’s easy to understand and they can put in up to $17,000 of their wages, which is far more than an IRA would allow. Robert opts for the 3% matching contribution. This way, if an employee doesn’t contribute, Robert isn’t obligated to either; if they do contribute, he’ll pitch in a match, which is a manageable expense. For instance, an employee earning $30,000 who contributes 5% ($1,500) will get an extra $900 from Bob (3% match). That’s a meaningful benefit to the employee without breaking the bank for the business.
Contrast this with Susan, a self-employed consultant with no staff. She could use a SIMPLE for herself, but since she has no employees to worry about, a SEP IRA or solo 401(k) would let her contribute a lot more in her high-income years. The SIMPLE’s $17k limit would actually cap her savings below what a SEP’s 25%-of-income calculation might allow. So in general, solo entrepreneurs lean toward SEP IRAs or solo 401(k)s, whereas small businesses with a team often lean toward SIMPLE IRAs if a full 401(k) isn’t feasible. The SIMPLE is also a common stepping stone. A business might start with a SIMPLE IRA when it’s small, and later upgrade to a 401(k) plan as it grows beyond 100 employees or needs higher contribution limits for owners.
SEP vs. SIMPLE: Key Differences at a Glance
Both SEP and SIMPLE IRAs are IRA-based retirement plans that are easier to manage than a 401(k). However, they have important differences in how contributions are made and who they benefit. Here’s a quick side-by-side comparison of major features (and how the rules change from 2025 to 2026):
SEP vs SIMPLE IRA
- High limit — up to $72k (2026)
- Flexible contributions (0–25% yearly)
- Set up as late as tax deadline
- Minimal paperwork
- Employer-only funding
- Must contribute same % for all employees
- No catch-up contributions
- Employees can defer their own salary
- Catch-up contributions available (50+)
- Lower employer cost if using match
- Easy administration
- Lower limit — $17k employee (2026)
- Employer must contribute every year
- 25% penalty if withdrawn within 2 years
SIMPLE IRAs are often favored by small employers with staff, because each employee’s own deferrals do most of the work, and the employer just supplements with a modest match or 2% contribution. It’s a trade-off between higher potential contributions (SEP) and broader employee participation (SIMPLE).
Conclusion and Next Steps
Choosing between a SEP IRA and a SIMPLE IRA in 2026 comes down to your business size, cash flow, and retirement savings goals. To recap: SEP IRAs provide higher contribution potential and maximum flexibility for the employer, which is fantastic for self-employed high earners or those without employees. SIMPLE IRAs create a shared saving opportunity for you and your team, with lower limits but an easy, incentivizing structure for employees to build their retirement.
Both have received useful upgrades under recent laws – from bigger catch-up limits to optional Roth features – which savvy business owners should factor into their planning.
Are you taking advantage of today’s tax breaks? Is your business’s retirement plan the optimal one for your situation, or could you benefit from a different structure?We specialize in looking at the full picture, integrating your business retirement plan with your personal retirement and estate planning goals. We’ll examine your current plan (SEP, SIMPLE, 401(k), or otherwise), your tax bracket outlook, and opportunities like Roth conversions or advanced deduction strategies. If you have stock options or significant stock positions, we’ll incorporate those into a cohesive plan to help prevent anything from falling through the cracks.
Sources:
- Fidelity – SEP IRA contribution limits for 2025 and 2026. Fidelity Smart Money article (Nov. 17, 2025). [Key 2026 limit: 25% of compensation up to $72,000]
- IRS – *401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500* (IR-2025-111, Nov. 13, 2025).
- Investopedia – Simplified Employee Pension (SEP) IRA. (Updated 2024). [SEP IRAs allow discretionary employer contributions (0–25% of pay) and have eligibility criteria age 21, 3 years’ service, $750 compensation]
- Investopedia – SIMPLE IRA: How Small Businesses Use It. (Updated 2024). [Eligibility: up to 100 employees; employees who earned ≥ $5,000 in any 2 prior years and expected $5,000 current year can participate]
- Investopedia – SIMPLE IRA: Drawbacks. (Updated 2024). [Employer must contribute each year (match up to 3% or 2% nonelective); cannot skip annual contributions without terminating plan]
- Fidelity – Understanding SEP IRAs. (2025). [All eligible employees must receive the same percentage contribution; employer can vary contribution rate year to year (including 0% in some years)]
- IRS – Simplified Employee Pension (SEP) Plan Overview. [IRS guidance on SEP structure, employer-only funding, eligibility, and contribution rules. SEP plans are typically used by owner-only businesses, while SIMPLE IRAs are more common for employers with staff.]
