SIMPLE IRA and SEP Plans

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SIMPLE IRA and SEP Plans

Two tax-deferred retirement plans designed especially for small businesses and their employees are SIMPLE IRAs and SEP plans.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

This is a variation on the traditional individual retirement account, allowing significantly higher tax-deferred contributions to encourage retirement savings. The plan is primarily employee-funded with employer matching contribution requirements. The employer has two options: it may match up to 3 percent of an employee’s contribution, if any. However, the employer match can drop to 1 percent in any 2 of 5 years. Alternatively, the employer may make a flat 2 percent contribution on behalf of all eligible employees (whether they contribute or not), instead of the matching arrangement.

Contribution limits

SIMPLE IRAs are limited to companies with fewer than 100 employees. An employee’s contribution, in the form of a current salary reduction, is limited to $16,500 per year for 2025. The law also allows taxpayers age 50 and above to make an extra "catch-up" contribution each year of $3,500. Starting in 2025, employees age 60 to 63 can make a catchup contribution of up to $5,250 instead.

Roth versions of SIMPLE IRAs are now allowed.

Simplified Employee Pension (SEP)

The simplified employee pension is an employer-sponsored plan designed to help small businesses provide greater retirement benefits to their employees than those available through the SIMPLE IRA. With a SEP, the employer contributes directly to the IRA of each participating employee.

Contribution limits

There are higher contribution limits in a SEP than in a SIMPLE. Employers may contribute up to 25 percent of earned income or $70,000 per year for 2025, whichever is less, on behalf of the eligible employees.

Employee contributions to a newly created SEP are no longer allowed. However, SEPs established before 1997 may allow employee contributions of pre-tax income, up to certain maximums.

Both the SIMPLE and SEP plans bring the benefits of employer-sponsored retirement programs to the employees of small business.

Roth versions of SEPs are now allowed.

Expect the IRS to issue more guidance on the Roth versions of both plans.