A simplified employee pension (SEP) individual retirement account (IRA) and Roth IRA are two investment accounts that give you tax benefits to save for retirement.
However, these two accounts vary in terms of contribution limits and who they’re best for. Find out more about how these accounts differ to see which is right for you.
SEP IRA vs. Roth IRA: A quick comparison
SEP IRA
Roth IRA
Where to open
Brokers, banks or other financial institutions
Brokers, banks or other financial institutions
Investment options
All assets are permitted inside an IRA except collectibles and life insurance
The IRA custodian determines available investment options
All assets are permitted inside an IRA except collectibles and life insurance
The IRA custodian determines available investment option
Income limits
None
Individuals filing as single and head of household. Contribute up to $7,000 if your 2024 modified adjusted gross income (MAGI) is under $146,000; individuals with a MAGI above $146,000 can contribute a reduced amount until contributions are phased out upon reaching a MAGI of $161,000
Married couples filing jointly. Contribute up to $7,000 each if your MAGI is under $230,000 per year; married couples with a MAGI above $230,000 can contribute a reduced amount until contributions are phased out upon reaching a MAGI of $240,000
Contribution limits
Lesser of 25% of employee’s compensation or $69,000
Based only on the first $345,000 of the employee’s compensation in 2024 (1)
$7,000 for those under age 50
$8,000 for those aged 50 and over
Eligibility requirements
Employee is at least age 21
Employee has worked for the employer in at least 3 of the last 5 years
Employee will receive at least $750 in compensation for 2024 (2)
No age requirements, but you need earned income to contribute
Income limits apply
Who can contribute
Employers
Anyone with earned income, so long as their income doesn’t exceed a certain threshold
Tax advantages
Structured as a traditional IRA, which offers:
Tax-deductible contributions
Tax-deferred growth
Earnings grow tax-free
Qualified withdrawals are tax-free
Withdrawal restrictions
Withdrawals before age 59.5 generally incur a 10% additional tax
Withdrawals of earnings before age 59.5 from a Roth IRA you’ve held less than five years will incur taxes and penalties (exceptions apply)
Withdrawals of earnings after age 59.5 from a Roth IRA you’ve had more than five years will be subject to taxes but not penalties
Required minimum distributions (RMDs)
Must begin taking RMDs on April 1 of the year following the calendar year in which you reach age 73
None
FDIC insurance
SEP IRAs that contain bank deposits such as CDs, savings accounts or money market accounts are insured up to $250,000
Roth IRAs that contain bank deposits such as CDs, savings accounts or money market accounts are insured up to $250,000
SIPC insurance
SIPC insures cash and securities up to $500,000 at SIPC-member brokers
SIPC insures cash and securities up to $500,000 at SIPC-member brokers
Pros
Tax-deductible contributions
Tax-deferred growth
Employee is 100% vested
Relatively high contribution limits
Flexible investment options
Tax-free growth and qualified distributions are tax-free
No RMDs
Withdraw contributions at any time without tax or penalty
Flexible investment options
Cons
Only employers can contribute to the account
Withdrawals before 59.5 are taxed as ordinary income and receive a 10% tax penalty
Must hold account for five years to withdraw funds penalty-free
SEP IRAs and Roth IRAs are both tax-advantaged retirement accounts in which individuals can invest in a range of assets, but their tax structures and who can contribute are what differentiate these accounts the most.
When to consider a SEP IRA
A SEP IRA may be a good option if you:
Are an employer. A business of any size, even self-employed, can establish a SEP IRA.
Want to set aside retirement savings for yourself and your employees. Without the startup and operating costs of a 401(k) and relatively high contribution limits, a SEP IRA can be a good option if you want to help employees save for retirement.
When to consider a Roth IRA
Consider a Roth IRA if you:
Want an IRA outside of workplace savings. Even if an employer contributes to a SEP IRA on your behalf, contribute to your own individual IRA. Contribute up to $7,000 in total across all your Roth IRAs and traditional IRAs in 2024.
Want matching contributions.Robinhood offers IRA matches. Robinhood will match up to 3% on IRA contributions when you subscribe to
Robinhood Gold or 1% when you don’t.
While both SEP IRAs and Roth IRAs are two types of IRAs, they differ greatly in terms of contribution limits, tax structure and who can contribute.
However, SEP IRAs and Roth IRAs share these similarities:
Trading platforms. If you open a SEP IRA or Roth IRA with a broker, you’ll have access to the same trading platform and available tools.
Investment options. Invest in stocks, bonds, exchange-traded funds (ETFs), mutual funds and more in SEP IRAs and Roth IRAs.
SEP IRA vs. Roth IRA: Where to open these accounts
SEP IRAs and Roth IRAs are available at many banks, brokers and other financial institutions. However, while Roth IRAs are a common account type, not every bank or broker offers SEP IRAs. The best stock trading apps offer SEP IRAs, Roth IRAs and other account types, letting you invest for different goals all under one roof.
Alternatives to a SEP IRA and a Roth IRA
While SEP IRAs and Roth IRAs are great options to trade and invest, other accounts may be more appropriate depending on your goals:
SIMPLE IRA. Similar to a SEP IRA, this account lets employers and employees contribute to traditional IRAs set up for employees. In 2024, employees can contribute up to $16,000 to a SIMPLE IRA.(3)
Solo 401(k). This is structured as a traditional 401(k) plan, but it’s designed for a business owner with no employees or that person and their spouse. Solo 401k contribution limits sit at $69,000 in 2024, with an additional $7,500 catch-up contribution for those 50 or older.
Compare brokerages that offer IRA accounts
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Frequently asked questions
Is a Roth IRA better than a SEP IRA?
A Roth IRA isn’t necessarily better than a SEP IRA. These two retirement accounts have different purposes. Individuals set up Roth IRAs to fund their own retirement savings, while employers set up SEP IRAs and contribute on their employees’ behalf.
What is the downside of SEP IRA?
A couple of downsides to SEP IRAs are that only employers contribute to the account and the same withdrawal restrictions of traditional IRAs apply — withdrawals before 59.5 are taxed as ordinary income and receive a 10% tax penalty.
Who is a SEP IRA best for?
A SEP IRA is best for employers of any size who want to offer a retirement savings plan but don’t want to pay the startup and operating costs of a 401(k).
Do you pay taxes on a SEP IRA?
Employers can deduct their contributions, and employees don’t need to include these contributions in their gross income.
Matt Miczulski is an investments editor at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.
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