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Ask a Fool: Does an SEP-IRA or SIMPLE IRA Allow Me to Save More for Retirement?

By Matthew Frankel, CFP® – Aug 30, 2019 at 12:00PM

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The answer depends on a few factors.

Q: I'm self-employed and I read that SEP-IRA and SIMPLE IRA accounts can allow me to save more money than a traditional or Roth IRA. Which has the higher limit?

Both types of retirement plans have potentially higher contribution limits than a traditional or Roth IRA. However, the higher option for you depends on your income, as these accounts have different methods of determining your annual contribution limit.

Let's start with the SEP-IRA. This one is pretty straightforward: Self-employed participants can contribute as much as 20% of their gross income, up to a maximum of $56,000 in 2019. If you're 50 or older, the maximum is $62,000.

The SIMPLE IRA is a bit more complicated. Self-employed individuals can contribute as much as $13,000 to their accounts in 2019, regardless of income, with an additional $3,000 allowance if you're 50 or older. In addition, you are allowed to contribute an additional "employer matching contribution" of as much as 3% of your salary.

To show how this could work, let's consider two examples. For both, we'll assume you're under 50.

If you're self-employed and earn gross income of $40,000 in 2019, you can contribute as much as $8,000 to a SEP-IRA in 2019. However, you can contribute $13,000 to a SIMPLE IRA plus 3% of your income for a total of $14,200.

On the other hand, if you earn $200,000 in 2019, your SEP-IRA contribution limit will be $40,000, while your SIMPLE IRA maximum will be just $19,000.

In short, if you're trying to save as much as legally possible, the SEP-IRA favors higher-income individuals while the SIMPLE IRA is the best option for lower-income savers. By calculating both limits for your income, you can determine the better option for you.

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