SEP IRA vs 401(k) for Small Business Owners

As a small business owner, one of the most important decisions you can make for your financial future is selecting the right retirement savings plan for yourself and your employees. Regarding retirement plans, the most common options are the SEP IRA and the 401(k). While both of these plans allow you to save for retirement, they differ in important ways, especially regarding contribution limits, eligibility, tax advantages, and administration.

Understanding these differences is key to making the right decision for your business. In this blog, we’ll break down the core features of SEP IRAs and 401(k) plans, compare their pros and cons, and discuss which plan might better fit depending on your business size and structure. SEP IRA vs 401(k) for small business owners, let’s take a closer look at both options.

SEP IRA Vs 401(k): What is a SEP IRA?

The Basics of SEP IRA

A Simplified Employee Pension (SEP) IRA is a retirement plan primarily designed for self-employed individuals and small business owners. This plan allows business owners to make tax-deferred contributions to their retirement savings, and it’s one of the most straightforward retirement plans for small businesses to implement.

• Eligibility for SEP IRA: Employees of small businesses are eligible if they have worked for the employer for at least three of the last five years, are 21 or older, and have earned at least $650 in 2025.
• Contribution Limits: In 2025, the SEP IRA contribution limit is the lesser of $66,000 or 25% of the employee’s salary, whichever is lower.
• Administrative Ease: One of the key benefits of the SEP IRA is its simplicity. The plan is easy to set up and requires minimal paperwork and administration, making it ideal for small businesses with limited resources.

What is a 401(k)?

The Basics of 401(k)

A 401(k) plan is a more commonly known retirement savings plan offered to employees of private-sector companies. This plan allows employees and employers to contribute to the employee’s retirement savings. 401(k) plans are governed by the Employee Retirement Income Security Act (ERISA), which ensures they meet specific operating standards.

• Eligibility for 401(k): Most private-sector employees are eligible for a 401(k) plan, though companies can impose restrictions such as requiring employees to have worked a certain number of hours or months before becoming eligible.
• Contribution Limits: In 2025, employees can contribute up to $22,500 to their 401(k), with a catch-up contribution of $7,500 available for employees over 50.
• Employer Contributions: Many employers offer matching contributions, typically matching 50% or 100% of an employee’s contributions, up to a certain percentage of their salary.

Key Differences Between SEP IRA and 401(k)

1. Employer Contributions

• SEP IRA: Only the employer contributes to the plan. Employers are not required to contribute every year, and contributions can vary depending on the business’s financial condition. Employers can contribute up to 25% of each employee’s annual salary, with a maximum of $66,000.
• 401(k): In a 401(k), both the employee and the employer can contribute. Employees can decide how much of their salary to contribute (up to the annual limit), and employers often match a portion of the employee’s contributions. The typical employer match might be 50% of the employee’s contribution up to 6% of their salary. Some employers may offer more generous matching programs.

2. Contribution Limits

• SEP IRA: The contribution limit for SEP IRAs is significantly higher than that of a 401(k). In 2025, the SEP IRA contribution limit is $66,000 or 25% of the employee’s salary, whichever is lower. This makes the SEP IRA an excellent option for business owners who want to contribute a substantial portion of their earnings toward retirement.
• 401(k): In 2025, the contribution limits for a 401(k) are $22,500 for those under the age of 50. For those over 50, the catch-up contribution increases the limit to $30,000. While the limits are lower than those for the SEP IRA, the 401(k) has the added benefit of employee participation, with employers often offering a match.

3. Administrative Costs and Complexity

• SEP IRA: One significant advantage of a SEP IRA is its simplicity. It’s easy to set up and requires minimal paperwork compared to a 401(k). Hiring an administrator or worrying about compliance testing or IRS filings is unnecessary. For small businesses with fewer employees or self-employed individuals, a SEP IRA is an ideal option because of its low-cost, low-maintenance structure.
• 401(k): 401(k) plans are more complex and require ongoing administration. Employers may need to hire a third-party administrator (TPA) to ensure compliance with IRS regulations and to handle annual filings. 401(k) plans often involve more fees for plan setup, administration, and investment management. Although 401(k) plans are more costly to maintain, they offer more investment flexibility and better employer matching options.

4. Investment Options

• SEP IRA: The investment options in a SEP IRA are usually more limited than those in a 401(k). SEP IRA accounts typically offer mutual funds and annuity contracts. However, some providers may offer options such as ETFs and index funds. While these options are suitable for some individuals, they may not offer the level of flexibility that many employees desire when choosing investments.
• 401 (k): A 401 (k) offers more diverse investment options. Participants can sometimes invest in stocks, ETFs, bonds, mutual funds, and even real estate or company stock. 401(k) plans also often allow self-directed brokerage accounts, which give individuals more control over their investment strategy.

5. Eligibility and Employee Participation

• SEP IRA: SEP IRA eligibility is determined by the employer. Employees must meet certain age and service requirements, such as being 21 or older and having worked for the company for at least three of the last five years. While employees can’t contribute to the plan themselves, they benefit from employer contributions.
• 401(k): In a 401(k), both employees and employers can contribute. Employees have more control over how much they contribute to their retirement savings, as contributions are made via payroll deductions. Employer contributions are typically made through matching, encouraging employees to save for retirement.

Which Plan Is Better for You?

When to Choose a SEP IRA

A SEP IRA may be the right choice for you if:

• You are a self-employed individual or small business owner with few employees.
• You want a low-cost, easy-to-manage retirement plan.
• You’re looking to maximize contributions to your retirement savings (up to $66,000).
• You don’t need to worry about the complexity of managing a 401(k) and prefer a plan with minimal paperwork.

When to Choose a 401(k)

A 401(k) might be a better fit if:

• You have a larger business with multiple employees and want to offer a competitive benefit package that includes employer matching contributions.
• You want to offer employees more investment options and greater flexibility.
• You’re looking to provide employees with the opportunity to save and participate in retirement planning, especially if you plan to match their contributions.
• You need a structured plan with greater control over investment choices.

Table: SEP IRA vs. 401(k) Comparison

Feature	SEP IRA	401(k)
Eligibility	Self-employed, small business owners, employees of tax-exempt organizations	Available to employees of private-sector companies
Contribution Limits	$66,000 (under 50), $30,000 (50 and above)	$22,500 (under 50), $30,000 (50 and above)
Employer Contributions	Yes, mandatory employer contributions	Yes, but matching is optional
Employee Contributions	No employee contributions	Yes, employees can contribute
Investment Options	Limited (mutual funds, annuities)	Wide range (stocks, mutual funds, ETFs, etc.)
Administrative Fees	Low, simple setup	Higher, complex setup and management costs
Best For	Self-employed, small business owners	Larger businesses, companies with multiple employees

How Beem Can Help You Manage Your Money Better

Managing your retirement savings and overall financial health is essential. Beem can help you with both by offering financial tools that ensure you stay on top of your daily spending, manage emergency expenses, and contribute regularly to your retirement accounts. With Beem’s Everdraft™ feature, you can access emergency funds to cover short-term needs without disrupting your long-term savings strategy. Additionally, Beem’s budgeting tools help you stay on track by giving you a comprehensive view of your finances.

Conclusion

Selecting between a SEP IRA and a 401(k) comes down to your business size, employee needs, and long-term retirement goals. While both options offer tax-deferred growth, the decision ultimately depends on your level of control, the costs involved, and how much you want to contribute to your employees’ futures. 

With Beem’s budgeting tools, you can track your income, set up savings goals, and make smarter financial decisions to ensure you’re working toward a secure future. In addition, Beem’s Everdraft™ lets you withdraw up to $1,000 instantly and with no checks. Download the app here.

FAQs on SEP IRA vs 401(k) for Small Business Owners