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 | 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. |
| 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 |
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| Learn more about Roth IRAs |
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.
A SEP IRA may be a good option if you:
Consider a Roth IRA if you:
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:
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.
While SEP IRAs and Roth IRAs are great options to trade and invest, other accounts may be more appropriate depending on your goals:
Narrow down top brokers by annual fee, stock trade fee and more to find the best for your financial goals.
The Finder Score crunches 147 key metrics we collected directly from 18+ brokers and assessed each provider’s performance based on nine different categories, weighing each metric based on the expertise and insights of Finder’s investment experts. We then scored and ranked each provider to determine the best brokerage accounts.
We update our best picks as products change, disappear or emerge in the market. We also regularly review and revise our selections to ensure our best provider lists reflect the most competitive available.
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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.
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.
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).
Employers can deduct their contributions, and employees don’t need to include these contributions in their gross income.
The best Roth IRA investments may include a mix of index funds, dividend stocks, bond funds and other long-term investments.
Explore the pros and cons of the best SEP IRAs and learn how to open one of these accounts.
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