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What is the difference between SIMPLE and SEP IRA?

A Simplified Employee Pension (SEP) IRA and a Savings Incentive Match Plan for Employees (SIMPLE) IRA are both retirement plans designed for small businesses and self-employed individuals. While they share similarities, key differences exist in terms of contribution limits, eligibility, and funding responsibilities.

1. Contribution Limits

• SEP IRA: Employers can contribute up to 25% of an employee's compensation, with a maximum limit of $70,000 for 2025. citeturn0search2
   
• SIMPLE IRA: Employees may defer up to $16,500 in 2025, with an additional catch-up contribution of $3,500 for those aged 50 and above. Employers are required to either match employee contributions up to 3% of compensation or make a non-elective contribution of 2% of compensation. citeturn0search2
   

2. Eligibility

• SEP IRA: Available to businesses of any size, but typically favored by small businesses or self-employed individuals. Employees eligible for participation are those aged 21 or older who have worked for the employer in at least three of the last five years and have received at least $750 in compensation. citeturn0search3
   
• SIMPLE IRA: Restricted to employers with 100 or fewer employees who earned $5,000 or more in compensation during any two preceding years and are expected to earn at least $5,000 in the current year. citeturn0search3
   

3. Funding Responsibilities

• SEP IRA: Funded solely by employer contributions; employees do not contribute. citeturn0search1
   
• SIMPLE IRA: Funded by both employee salary deferrals and mandatory employer contributions, either through matching or non-elective contributions. citeturn0search1
   

4. Vesting

• Both Plans: Employees are immediately 100% vested in all contributions, meaning they have full ownership of the funds as soon as they are deposited. citeturn0search1

5. Administrative Requirements

• SEP IRA: Minimal administrative requirements with no annual filing obligations, making it relatively easy to establish and maintain. citeturn0search1
   
• SIMPLE IRA: Also straightforward to administer but requires employers to adhere to specific contribution mandates and provide employees with certain notices. citeturn0search1
   

6. Ideal For

• SEP IRA: Suited for businesses seeking flexibility in contributions, especially those with variable cash flows, as contributions are discretionary and can vary each year. citeturn0search5
   

SIMPLE IRA: Ideal for small businesses aiming to offer a retirement plan that allows both employer and employee contributions, with mandatory employer contributions ensuring consistent employee benefits. citeturn0search5