SEP-IRA vs. Traditional IRA: What Actually Differs

01Who puts the money in

This is the cleanest way to keep them straight. You fund a traditional IRA yourself, out of personal money. A SEP-IRA is funded by the employer — which, when you are self-employed, is still you, but wearing the business hat. The IRS is explicit that only the employer contributes to a SEP and that employees cannot make salary deferrals into one.

02How much can go in

A traditional IRA has a flat annual ceiling that applies to everyone, with a catch-up for older savers. A SEP is calculated as a percentage of compensation, up to a cap. For anyone with meaningful self-employment income, the SEP room is substantially larger. For someone with a small side income, the flat IRA limit may actually be the higher of the two. Both figures are indexed and move; check the current IRS numbers rather than a blog post, including this one.

03The compensation calculation is not what people expect

For a self-employed person, the SEP contribution is not simply a percentage of profit. It is based on net earnings from self-employment reduced by half of your self-employment tax and by your own SEP contribution — which makes it circular, and is why the effective percentage is lower than the headline rate. This is the single most common place I see people over-contribute by accident.

04Deductibility works differently

A SEP contribution is a business deduction. A traditional IRA contribution is a personal deduction, and whether you get it at all depends on your income and on whether you or a spouse are covered by a workplace retirement plan. Two people with identical income can get very different answers on the traditional IRA and identical answers on the SEP.

05You can often have both

Having a SEP does not automatically bar you from a traditional or Roth IRA. It can, however, affect whether the traditional IRA contribution is deductible, because a SEP generally counts as being covered by a workplace plan. That is a real interaction and it catches people who assumed the two were independent.

06The employee question, again

If your business has eligible employees, the SEP obliges you to contribute for them at the same rate you use for yourself. A traditional IRA carries no such obligation because it is not a business plan at all. For an owner with staff, that difference can be larger than the contribution limits themselves.

This article is general information, not individualized tax, legal, or financial advice. Every situation is different — reach out and we'll look at yours directly.