SEP IRA vs. Roth IRA: What’s the Difference — and Should You Use Both?

A SEP IRA receives employer retirement contributions; a personal Roth IRA receives your regular IRA contributions. They have separate limits. For 2026, a SEP contribution can reach $72,000, but compensation and the plan formula can make the actual amount much smaller. Regular Traditional and Roth IRA contributions share a $7,500 limit, or $8,600 if you are 50 or older by year-end, with compensation and income conditions.

The useful question is not just which account has the bigger number. It is who contributes, what pay counts, and whether employees must receive contributions too. A SEP can cover a business with staff; it is not an owner-only plan.

SEP IRA vs. personal Roth IRA: the practical differences

Sources: IRS Notice 2025-67 for 2026 limits; Publication 560 for SEP rules; Notice 2024-2, section K for Roth SEP treatment; Publication 590-B for IRA withdrawals.

Why “25% of profit” is usually the wrong SEP calculation

For an employee, the plan can use up to 25% of qualifying compensation. For a sole proprietor, the calculation accounts for the deductible part of self-employment tax and the owner's contribution itself. A 25% plan rate becomes a 20% reduced rate applied to profit after the deductible part of self-employment tax. It is not 25% of revenue, or even a flat 20% of Schedule C profit.

We keep precision until the final displayed amount; tax-return rounding can differ. Other wages, other businesses and other plan contributions can change this calculation. Use the worksheets in Publication 560, chapter 5 and the self-employment-tax calculation in Publication 505, not this example as a deposit instruction.

For contrast, an S corporation paying an owner $100,000 of qualifying W-2 compensation could have a $25,000 employer SEP contribution at a 25% rate, before any combined-plan constraints. Shareholder distributions are not plan compensation. “LLC” alone does not tell you which calculation applies: its tax treatment matters. See the IRS S-corporation contribution FAQ.

A SEP does not stop working when you hire employees

The trade-off is the funding obligation. The usual maximum eligibility conditions are age 21, service in at least three of the preceding five years, and at least $800 of compensation in 2026. A plan can be less restrictive; certain collectively bargained and nonresident-alien employees can be excluded. Part-time service can count. Check the document and employee records rather than assuming “not full-time” means ineligible.

A simple budget example: a corporation uses a uniform 10% SEP contribution rate. Its owner earns $100,000 and two eligible employees earn $50,000 each. The employer contributes $10,000 for the owner and $5,000 for each employee: $20,000 total. Those employee contributions are immediately vested. This is an illustration, not a required 10% rate. For a self-employed owner, the reduced-rate calculation above means you cannot compare the owner's percentage of net profit directly with an employee's percentage of pay.

SEP contributions can vary from year to year, including no contribution in a year. When the employer funds the plan, it must follow its contribution formula for eligible employees. See the IRS SEP overview.

Simple paperwork is not “no plan document”

1. Adopt a written agreement. A qualifying employer may use Form 5305-SEP, a provider's prototype or an individually designed document. Form 5305-SEP is not available in every situation—for example, generally not when the employer maintains another qualified plan other than another SEP.
2. Give eligible employees the required information and establish their SEP IRAs. Keep the agreement and contribution records.
3. Check the deadline. A SEP can generally be established and funded for a year by the business's income-tax-return deadline, including extensions. The relevant business return matters; do not assume every owner has the same date.

A SEP generally does not require the employer to file an annual Form 5500. That does not eliminate IRA-provider reporting, income-tax reporting or the need to maintain records. Regular personal IRA contributions generally have the individual's return due date without extensions, so the two funding deadlines are not interchangeable.

Can you have both a SEP and a personal Roth IRA?

Yes, if you meet both sets of rules. Employer SEP contributions do not directly use your regular IRA limit. But the deductible part of self-employment tax and your deductible owner-plan contribution can reduce the compensation available for a personal IRA. Prior regular Traditional and Roth IRA contributions also use the shared personal limit.

For 2026, the direct Roth contribution phase-out is $153,000–$168,000 for single or head-of-household filers, and $242,000–$252,000 for married filing jointly or qualifying surviving spouses. Married filing separately is generally $0–$10,000 if you lived with your spouse at any time in the year; someone who lived apart all year uses the single range. These are Roth MAGI figures, not business revenue. See the eligibility guide and Publication 590-A.

A SEP contribution allocated for you can also make you an active participant for the separate Traditional IRA deduction test. That deduction test is not the same as permission to contribute to a personal IRA.

A traditional SEP can affect a Roth conversion

The owner's non-Roth IRA calculation generally combines traditional IRAs, traditional SEP IRAs and traditional SIMPLE IRAs. Roth IRA, Roth SEP and Roth SIMPLE balances are not in that pool. Inherited accounts are generally separate unless a spouse treats one as their own. A new nondeductible IRA contribution does not automatically make a subsequent conversion tax-free.

A plan that accepts roll-ins may accept eligible pre-tax IRA money, but not nondeductible IRA basis. SIMPLE's two-year restriction and the receiving plan's rules still matter. Use Form 8606's instructions for December 31 values, distributions and outstanding rollovers; a slogan such as “move it by year-end and you're done” is not a complete tax calculation. Start with the Backdoor Roth Diagnostic.

SEP or solo 401(k): compare the obligations as well as the limit

A solo 401(k) can add employee deferrals and eligible catch-ups to the employer contribution. That can create more room at a given profit level, but it brings plan-administration and employee-eligibility requirements. Employer SEP contributions have no catch-up; older salary-reduction SEPs (SARSEPs) are a distinct arrangement, not a new SEP option.

Neither account is an automatic winner. Compare employee costs, available compensation, other plans, provider features and fees, tax treatment and paperwork. Both SEP and qualified-plan employer contributions can have optional Roth treatment under current law when the applicable requirements are met. A personal Roth IRA is another ledger, not a substitute for checking those business-plan obligations.

For a step-by-step owner checklist and more worked examples, use the business-owner scorecard.