Self-Employed? SEP or SIMPLE IRA - Which is Better?

If you are self-employed or receive a 1099 for outside work, you are eligible to defer taxable income into a retirement plan. This allows you to sidestep paying income tax on these funds until you withdraw them for future use, hopefully, during a time when your tax rate may be lower.

The Basics of a SEP-IRA

Tax preparers will commonly suggest a SEP-IRA when they see self-employment income on your tax return. This is because you can set up a SEP-IRA for the prior calendar year, anytime up to the time you file your taxes, including extensions. This flexibility is attractive as you can decide to open and fund a SEP-IRA as late as the fall of the following year (if you were to file an extension).

A SEP-IRA is a retirement plan that allows you to defer up to 25% of your net self-employed income without conflicting with your ability to contribute to a traditional or Roth IRA as well.  There’s a twist to the 25% rule, however. Specifically, the limit is 25% of your net self-employment income after deducting both the contribution itself and half of your self-employment taxes. 

Sound complicated? Don’t worry, your tax preparer or tax preparation software knows how to calculate your eligible contribution amount. As a shortcut, plan on being able to contribute a little bit less than 20% of your net self-employment income to a SEP-IRA in any given year. For example, if your net self-employment income is $50,000 for the year, you can defer up to just under $10,000 to a SEP-IRA plan for that year.

Note that if you have any employees, you must also make an equivalent contribution for them.

The Basics of a SIMPLE IRA 

A SIMPLE IRA also allows you to make pre-tax contributions. However, this has to be done during the calendar year in question, not afterwards. So, it takes some planning ahead.

A SIMPLE IRA works like a 401(k) plan with a match. In 2026, participants can defer up to $18,100 (assuming the business has no more than 25 participants). Participants age 50 or older are also able to defer an additional $3,850 for a potential total of $21,950 in contributions. However, the contributions from the participants must be made during the year. On top of this, the employer must make a matching contribution of 3% of compensation, although like all employer contributions, this can be made anytime up to the tax filing, including extensions.

Using the prior example of a net of $50,000 self-employment income, a SIMPLE IRA would allow someone to defer $18,100 to the plan, plus receive an additional $1,500 (3%) as an employer match for a total of $19,600. That’s $9,600 more than can be deferred into a SEP-IRA. And, if that person is age 50 or older, the SIMPLE IRA allows an additional $3,850 as a catch-up election, bringing the total tax-deferred contributions to $23,450!

Which is right for you?

While SEP-IRAs are popular accounts to open during the tax season due to their flexible timing, by planning ahead, the SIMPLE IRA may allow self-employed people to defer higher amounts and to save more for retirement. 

Reach out if you have self-employment income and would like help thinking through the type of savings plan that makes the most sense for you.