SEP IRA vs. 401(k)
If you’re a business owner and thinking about opening a retirement plan, first off, congratulations! That’s a big step and choosing the best 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 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 may be best 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 ($70,000 for 2025) are significantly higher than for a traditional or Roth IRA ($7,000 for 2025).
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.
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 | Lesser of $70,000 for 2025 or 25% of aggregate compensation for all eligible employees2 | $70,000 for 2025 when combined with employer contributions. $23,500 for 2025 for employee contributions)3 |
Employee catch-up contributions | Not available | Available, $7,500 per year for 2025 if age 50 and over |
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 filings, minimal administrative duties, required information provided to eligible employees, participants required to open a SEP IRA account (typically a traditional IRA) | Requires annual filing with the IRS, 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 $750 (in 2025) from your business for the year.4 | Can have more restrictive requirements for eligibility to participate. |
SECURE Act tax credits | Available if eligibility requirements are met | Available if eligibility requirements are met |
Another way to look at this is by identifying the plan features that are most important to you. Here you can see the different services and features Guideline provides for both types of retirement plans.
Retirement plan feature | Guideline SEP IRA | Guideline 401(k) |
---|---|---|
Tax-deferred savings | ✔ | ✔ |
Access to Guideline investment portfolio with auto-rebalancing | ✔ | ✔ |
Loan availability | ✘ | ✔ |
Flexible contribution schedule | ✔ | ✘ |
Employee contributions | ✘ | ✔ |
Employer contributions | ✔ | ✔ |
Carryback contributions (i.e. you can make employer contributions for a given year until the income tax filing deadline of the following year) | ✔ | ✔ |
Flexible allocation method for profit sharing | ✘ | ✔ |
At Guideline, our SEP IRA and 401(k) plans are two distinct products, but they share a similar structure. Both offer professionally managed portfolios and automatic rebalancing without added investment management fees. Both are easy to set up, easy to manage and easy to get support when needed—all for a low monthly fee.5
Whether you set up a SEP IRA or 401(k) plan — you’ll be opening an affordable retirement plan that can help you save for your future.