SEP IRA vs. traditional IRA: How they compare

If you’re self-employed or own a small business, choosing your retirement benefits can feel a little like facing a buffet: There are plenty of choices, but which ones belong on your plate?

Two popular options are the SEP IRA (simplified employee pension) and traditional IRA. Both offer tax advantages that can support your retirement goals, but they differ in who can contribute, how much and how contributions are taxed. Those differences can affect both your taxes today and your income in retirement.

Read on to explore the advantages and drawbacks of SEP IRAs vs. traditional IRAs, so you can decide which one may make more sense for you.

A SEP IRA is a retirement plan designed for self-employed people and small business owners. As the employer, you make tax-deductible contributions to a SEP IRA for yourself and for any eligible employees. If you work for yourself with no employees, you simply contribute for yourself.

Employees can't add to a SEP IRA from their own paychecks; only the employer contributes. Those contributions go in pre-tax and grow tax-deferred, and over time the account can benefit from the power of compounding.

SEP IRAs are simple to set up and maintain, and contributions aren't required every year. That gives business owners flexibility: if you're putting a family member through school or facing a big expense, you can scale back or skip a year without penalty.

If you wait until age 59½ to withdraw, you avoid the 10% additional tax on early withdrawals. However, SEP IRA withdrawals are generally subject to income tax and required minimum distribution (RMD) rules.

The SECURE Act 2.0 created a Roth option for SEP IRAs, but not every provider offers it yet, so check with yours before counting on it. If it's available, you or your employees can elect Roth treatment, meaning contributions go in after-tax instead of pre-tax. The money still grows tax-deferred, but qualified withdrawals in retirement are tax-free.

A traditional IRA is a retirement savings account that you open on your own through a bank, brokerage or other financial institution.

To qualify for a traditional IRA:

• You or your spouse must have earned income, such as wages, salary, tips or net earnings from self-employment.
• Passive income, such as rental income, interest or dividends, doesn't count.

There are no age limits or income limits on contributing, though how much you can deduct may depend on your income.

Like SEP IRAs, once you reach age 59½, you can withdraw funds penalty-free. However, you’re still responsible for ordinary income taxes from those withdrawals.

You also can have a traditional IRA alongside a SEP IRA to boost your savings even more. Just know that once you're covered by a workplace plan, including your own SEP IRA, your ability to deduct traditional IRA contributions may be limited based on your income.

Although SEP IRAs and traditional IRAs both have their perks as retirement plans, there are four key differences when it comes to participation requirements, contribution limits, tax treatment and investment options.

SEP IRAs are available to you whether you are self-employed with no employees, or if you own a business and have employees working for you.

If you’re a business owner who offers a SEP IRA, your eligible employees must:

• Be 21 years old
• Have worked for you at least three of the previous five years
• Have earned at least $800 during the tax year (for 2026)

To qualify for a traditional IRA:

• You or your spouse must have earned income from wages, salaries or tips
• Eligible income can’t be from real estate rentals, interest, dividends or other types of passive income
• There are no age requirements or income thresholds

How much can go into each account depends on the account type and, for SEP IRAs, on whether you're the business owner, an employee or self-employed. Here's how the 2026 limits break down.

• You choose one contribution rate, and it applies to everyone in the plan, including you.
• Every eligible employee must receive the same percentage, regardless of seniority or job title.
• For 2026, the most you can contribute to any one account is 25% of that person's compensation or $72,000, whichever is less.

If you're an employee earning $50,000 and your employer chooses the maximum 25% rate, $12,500 goes into your SEP IRA for the year. That money isn't counted in your taxable income, and it's fully yours from day one, even if you leave the company.

If you’re self-employed, your SEP IRA contribution is calculated differently. Your net earnings generally are adjusted for half of your self-employment tax and your SEP IRA contribution. Per the IRS, for a SEP plan with a 25% contribution rate, that generally works out to a 20% contribution rate for self-employed workers.

Hypothetically, let’s say you’ve made $75,000 in net self-employment income in one year.

1. The IRS first calculates your net earnings from self-employment at 92.35%. In this case, that's about $69,263.
2. Self-employment tax is 15.3% of that amount (12.4% for Social Security, 2.9% for Medicare), or about $10,597. You can deduct half of it, $5,299.
3. Subtract that deduction from your net profit: $75,000 − $5,299 = $69,701.
4. For a SEP plan with a 25% rate, the self-employed rate works out to 20%. So, 20% × $69,701 = about $13,940, your maximum contribution.

In this example, you'd contribute about $13,940 for yourself. If you also have five employees earning $50,000 each, you'd need another $62,500 for their accounts. That adds up quickly, which is why it pays to run the numbers before setting a contribution rate.

With a traditional IRA, annual contributions are limited to $7,500 if you're younger than age 50 in 2026. If you're 50 or older, you also can make a catch-up contribution of an additional $1,100 for a max of $8,600.

Deductibility works differently for SEP IRAs and traditional IRAs, and for business owners versus employees. Here's how it breaks down.

Whether you contribute for yourself or for employees, the business gets the deduction. Employees don't get a deduction for contributions made on their behalf, but the money isn't counted in their taxable income, and it grows tax-deferred. (One thing to know: if you make SEP contributions for yourself, you count as covered by a workplace plan, which can limit your traditional IRA deduction below.)

How much you can deduct depends on your income, your filing status and whether you or your spouse is covered by a workplace retirement plan. If neither of you is covered, your contributions are generally fully deductible. If either of you is covered by a workplace plan, the deduction phases out based on your modified adjusted gross income (MAGI):

• Full deduction if your MAGI is below the range.
• Partial deduction if it's within the range.
• No deduction if it's above.

Because both are IRAs, the investment choices are similar: mutual funds, ETFs, stocks, bonds and more, depending on the provider. The difference is who picks the provider. With a traditional IRA, that's you. With a SEP, the business owner chooses, though employees still control how their own money is invested.

In sum, here’s how SEP IRAs and traditional IRAs compare:

The right fit depends on factors like your employment situation, how much you want to contribute and the tax advantages that matter most to you.

Both SEP IRAs and traditional IRAs require you to take RMDs once you reach your RMD age. Under current law, the RMD starting age is 73 if you were born between 1951 and 1959 or age 75 if you were born in 1960 or later.

The exception is Roth accounts. Roth SEP IRAs don't require distributions during the original owner's lifetime.

If you're 70½ or older, you also can make qualified charitable distributions (QCDs) from a traditional IRA, or from a SEP IRA that's no longer receiving contributions, directly to an eligible charity. A QCD can satisfy all or part of your RMD for the year and is generally excluded from taxable income.

Whether you’re a business owner who wants to help your employees save or a sole proprietor, both a SEP IRA and a traditional IRA have their perks. A SEP IRA can allow you to save more than a traditional IRA, but if you have employees, you’ll generally need to contribute the same percentage of compensation to their accounts as well.

Meanwhile, a traditional IRA may be an attractive alternative if you want to save more but aren’t self-employed and can’t open your own SEP IRA. You don't necessarily have to choose one or the other. If you're eligible, you can fund both in the same year.

Regardless of which account you’re considering, you may want to speak with a local Thrivent financial advisor to discuss what makes the most sense for your future retirement needs. Your family’s budget, charitable goals and retirement priorities can help you determine which approach makes the most sense for you and your family.