If you're a business owner and thinking about opening a retirement plan, first off, congratulations! That's a big step and choosing the right plan for you can be stressful. This article will help guide you through the decision.
What is a SEP IRA?
Before we dive into the nitty gritty of a SEP IRA plan and how they compare with a 401(k) plan, let's cover some of the SEP IRA basics.
A SEP, which stands for Simplified Employee Pension Plan, is a tax-deferred retirement plan sponsored by a business owner (the employer). The employer makes contributions into a traditional or Roth IRA that is opened for each eligible employee. Contributions can be made at any time during the year, up until the tax filing deadline (with extensions). The employer has the flexibility to decide if and how much they want to contribute each year.
Because of this flexibility and minimal administrative requirements, SEP IRAs can be popular retirement accounts for self-employed individuals and other small business owners. Whether it's the best fit for you and your business can depend on multiple factors such as your business goals, whether you want to make employer contributions, and the number of employees you have, to name a few.
Who might be a good fit for a SEP IRA?
Self-employed individuals
SEP IRAs can be easy to establish and maintain. If your self-employment income is high, a SEP IRA is a convenient way to help maximize your retirement contributions and minimize administration.
SEP IRAs aren't subject to annual Department of Labor and IRS reporting requirements¹ and the contribution limits for a SEP IRA in ($72,000 for 2026) are significantly higher than for a traditional or Roth IRA ($7,500 for 2026 for those under age 50).
Individuals who own a small business as a side gig
Side gigs and freelance roles often have unpredictable or irregular incomes. SEP IRAs have flexible contribution rules that allow you to make contributions when your business is doing well and skip contributions when your business income is needed for other priorities. In addition, you have until your tax filing deadline, plus extensions, to contribute for the previous year.
Family-owned businesses
Because SEP IRAs require the employer to make contributions to all eligible employees, they may be a great option for family-owned businesses that employ family members. Business owners can share business profits with those family members, while saving for retirement and getting a tax deduction in the process.⁶
Who might want to consider a 401(k)?
Growing small businesses
If you're a small business with a few employees and want to provide a retirement plan that allows employees to make contributions and also includes the option to make employer contributions, a 401(k) plan could be a good alternative to a SEP IRA.
As your business grows, a 401(k) plan can be used to attract and retain talent as well — retirement savings is the second most important benefit to employees. Features such as a vesting schedule can provide employees an incentive to stay longer, and an employer match can act as an added incentive to attract employees and encourage them to contribute towards their retirement as well.
Still not 100% sure? This side-by-side chart of a SEP IRA and 401(k) plan should help.
Retirement plan feature | SEP IRA | 401(k) |
Deferral or employer contribution limit | Each employee is capped at the lesser of $72,000 for 2026 or 25% of their compensation² | $72,000 for 2026 when combined with employer contributions (excluding catch-up). $24,500 for 2026 for employee deferrals ³ |
Employee catch-up contributions | Not available | Available, In 2026, $8,000 up for those age 50-59, or 64+ — or $11,250 for those age 60–63 |
Contribution frequency | Flexible, however all contributions for a given tax year must be made by the due date of filing your federal income tax return (plus extensions). | Every time payroll is processed |
Who can contribute to the plan? | Employer only (or self employment income) | Employer and employee |
Plan design options | Eligibility (no customization) | Eligibility, vesting, elective deferrals, employer match and profit sharing, plan loans, class exclusions etc. |
Annual filings and administration | No annual filings1, minimal administrative duties | Requires annual filing with the DOL, multiple notices to participants, payroll deductions every pay period, annual non-discrimination testing, and potentially plan audits by IRS and DOL |
Opt-out requirements | Employee cannot opt out | Employee can opt out of employee deferrals |
Employee eligibility requirements | Must be included if eligibility rules elected for the plan are met; maximum rules are attained age 21, has worked three of the last five years, and earned at least $800 (in 2026) from your business for the year.⁴ | Can have more restrictive requirements for eligibility to participate. |
SECURE Act tax credits6 | Available if eligibility requirements are met | Available if eligibility requirements are met |
FAQs
What is the main difference between a SEP IRA and a 401(k)?
The main differences are who can contribute and how much each individual gets. With a SEP IRA, only the employer contributes and everyone must get the contribution as a percentage compensation. With a 401(k), both employees and employers can contribute and there is a lot more flexibility in giving different amounts.
What are the contribution limits for SEP IRAs and 401(k)s?
Both have a maximum limit of $72,000 in 2026. However, SEP IRA contributions are limited to 25% of compensation, while 401(k) employee deferrals can be up to $24,500 with additional catch-up contributions available and employer contributions on top of that.
Who is a SEP IRA best suited for?
SEP IRAs are ideal for self-employed individuals, small business owners with irregular income, and family-owned businesses looking for a simple, flexible retirement plan.6
Can employees contribute to a SEP IRA?
No, only employers can make contributions to a SEP IRA. If you want employees to be able to contribute, a 401(k) would be a better option.
Disclosures
¹ While there are no DOL reporting requirements for SEP IRAs, employer contributions are reported to the IRS on the employer’s tax return.
² If you are self employed, contributions are generally limited to 20% of your net income. Contribution limits to a SEP IRA are subject to cost-of-living adjustments annually. Learn more
³ The limit on employee elective deferrals to a 401(k) plan is subject to cost-of-living adjustments annually. Learn more.
⁴ Your plan may use less restrictive requirements to determine eligibility. Learn more.
⁵ See here for more information regarding fees.
⁶ This content is for informational purposes only and is not intended to be taken as tax advice. Please contact a tax professional for further information.
7Investment advisory services for Gusto’s 401(k) (when 3(38) fiduciary services are selected) and SEP IRA/IRA products are offered by Gusto Investment Services, LLC, an affiliated SEC-registered investment adviser. For more information regarding these services, see the ADV 2A Brochure and Form CRS.
Recordkeeping services for Gusto’s 401(k) and SEP IRA/IRA products are offered by its affiliate, Gusto Retirement Services, LLC. 3(16) plan administrative services are also offered by Gusto Retirement Services, LLC and only made available to clients who use the integration services available through Gusto’s payroll service. Gusto Retirement Services, LLC uses a third-party to provide custodial services.
