SIMPLE IRA vs. SEP IRA vs. 401(k): choosing the right plan
Short answer: a SEP IRA often suits owner-only businesses with uneven profits, a SIMPLE IRA suits teams of up to 100 that want simple, predictable costs, and a 401(k) suits owners who want to save the most. A 401(k) allows up to $24,500 in 2026 deferrals. Here is how the three compare.
| 2026 | SEP IRA | SIMPLE IRA | 401(k) |
|---|---|---|---|
| Employee deferrals | None; employer-funded only | $17,000, or $18,100 for employers with 25 or fewer employees (or 26–100 employees with a 4% match or 3% nonelective contribution); catch-up at 50+: $4,000, or $3,850 where the $18,100 limit applies; $5,250 at 60–63 | $24,500 (catch-up $8,000 at 50+; $11,250 at 60–63; must be Roth if prior-year FICA wages exceeded $150,000) |
| Employer contribution | Discretionary; same % of pay for every eligible employee, up to 25% of compensation (about 20% of net self-employment earnings for owners; pay counted up to $360,000 in 2026) | Required each year: a match of up to 3% of pay (can be reduced to as low as 1% in two of any five years), or 2% of pay for all eligible | Flexible: match, profit sharing or safe harbor |
| Max total per person | $72,000 | Deferral plus employer amount | $72,000 plus catch-up |
| Testing | None | None | Annual testing unless safe harbor |
| Paperwork and cost | Lowest | Low | Highest, most flexible |
| Often a fit | Owner-only or very small teams with uneven profits | Up to 100 employees wanting simple, predictable costs | Owners who want to save the most and design the benefit |
SEP IRA: simple, but the owner pays for everyone
Because the employer must contribute the same percentage of pay for every eligible employee, a SEP works best when the owner is the only employee or wants to reward everyone equally in good years. Owner-only businesses should also compare a solo 401(k) (see solo 401(k) vs. SEP IRA). Employees cannot make salary deferrals, though they may make regular IRA contributions to their SEP IRA.
SIMPLE IRA: predictable and easy
Employees save from their paychecks, and the business must contribute every year: either a dollar-for-dollar match up to 3% of pay (which can be reduced to as low as 1% in two of any five years, with notice) or 2% of pay for everyone eligible. A new SIMPLE IRA generally must be set up by October 1 to cover that year, and it usually has to be the employer’s only plan.
401(k): the most room to save and design
A 401(k) has the highest limits and the most flexibility: vesting schedules, profit sharing, Roth options and loans. The trade-off is annual nondiscrimination testing, which a safe harbor design can avoid. Many small businesses start with a SIMPLE IRA and move to a 401(k) as they grow (see how to switch). The switch generally takes effect January 1, though SECURE 2.0 allows a mid-year switch to a safe harbor 401(k).
Four questions that usually decide it
- How much does the owner want to save each year?
- Do employees want to save their own money?
- Is the business’s cash flow steady enough for a required contribution?
- How much administration are you willing to take on?
Common questions
What is the main difference between a SEP IRA and a SIMPLE IRA?
A SEP IRA is funded only by the employer, with contributions that can change or stop each year. A SIMPLE IRA lets employees save from their paychecks and requires the business to contribute every year, either a match or a fixed contribution.
Which plan lets a small business owner save the most?
A 401(k) generally has the highest limits: up to $24,500 in 2026 employee deferrals, plus catch-up contributions and employer contributions, up to $72,000 in total additions before catch-ups.
Can a business switch from a SIMPLE IRA to a 401(k)?
Yes. The switch generally takes effect January 1, and SECURE 2.0 also allows a mid-year switch to a safe harbor 401(k). Notice and timing rules apply, so plan the change a few months ahead.
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Request a plan reviewGeneral educational information as of September 24, 2026; limits and rules change. Not individualized investment, tax or legal advice. Consult your tax adviser about your situation.