Key Takeaways
- Both SEP and Keogh plans are designed for self-employed and small business owners.
- SEPs have a simpler setup and fewer requirements compared to Keogh plans.
- Keogh plans can be more complex but offer higher potential contributions.
- SEPs require equal employer contributions to all eligible employees.
- Keogh plans can be structured as defined-benefit or defined-contribution.
SEP vs. Keogh Plans: An Overview
The Simplified Employee Pension (SEP) plan and the Keogh plan are both designed for small business owners and their employees who want to put away more than the individual retirement account (IRA) contribution limit each year.
The main differences between SEP and Keogh plans are their contribution limits and requirements.
Here’s how to choose.
Simplified Employee Pension (SEP) Plan Overview
As the name implies, a SEP is fairly simple in structure and functions solely as a defined-contribution plan. That is, the participant automatically earmarks a percentage of gross income to be paid into a tax-deferred retirement account.
A SEP can be established by submitting Form 5305-SEP to the Internal Revenue Service (IRS). A business owner can get through the initial paperwork without the need for professional assistance.
SEP Plan Compliance and Contribution Flexibility and Limits
There are no annual filing requirements.
Employers are not required to make a contribution to their employees’ plans in any given year. If they make a contribution, it must be made equally to every full-time employee who is at least age 21 and has worked for the company for at least three of the past five years.
The SEP resembles an IRA in that participants can make contributions for the previous year up to the filing deadline, even if an extension has been granted. Participants cannot borrow from their plan balances.
For 2025, the maximum contribution for SEP accounts is the lesser of 25% of net earnings or $70,000 (increasing to $72,000 for 2026).
Important
The SEP plan and the Keogh plan are similar in some ways:
- Employees, as well as the business owner, may participate in these plans.
- All participants can deduct the amounts that they contribute from their taxable income each year.
- The money withdrawn after retiring is taxed as ordinary income.
- The account can be opened at just about any bank, brokerage, life insurance carrier, or mutual fund company.
- The money can be invested in a wide range of assets, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
Keogh Plan: Structure and Benefits
The Keogh plan is most popular with very high earners, such as physicians who are principals in medical practices and owners of unincorporated small businesses.
It is much more complex than the SEP. It falls under the guidelines of the Employee Retirement Income Security Act (ERISA), the federal law that sets minimum standards for employer-sponsored retirement and health plans. That makes a Keogh a “qualified plan” by definition.
Establishing and Managing a Keogh Plan
Establishing a Keogh for your business requires a complete plan document to be submitted to the government. In most cases, it’s wise to enlist a certified public accountant or financial advisor to help you prepare and submit the plan. A Keogh plan can have some tricky details that can come back to bite you if they are ignored.
The Keogh can be structured as either a defined contribution or a defined-benefit plan.
Keogh Plan Contribution Limits and Options
If it is structured as a defined-contribution plan, the contribution limits are the same as for a SEP. That is, the maximum for tax year 2025 is the lesser of 25% of net earnings or $70,000 (increasing to $72,000 in 2026).
The limits are higher for a defined-benefit plan. For tax year 2025, it is $280,000 (increasing to $290,000 in 2026).
A defined-benefit plan is similar to a pension in that it establishes a set benefit amount to be paid in equal installments during the retirement of the planned participant.
The defined contribution plan can be structured as a money purchase or a profit-sharing plan. Many business owners opt for the latter because it allows them to make different contributions each year, corresponding to their profits.
Money purchase pension plans do not have this flexibility. The business owner must elect to contribute a set percentage every year for the life of the plan. Penalties are assessed if an annual contribution falls below that amount.
These plans come with annual reporting requirements on Form 5500. Loans against the balance can be taken within certain restrictions.
Choosing Between SEP and Keogh Plans
If you run a small business and you would like to establish a plan for your employees as well as yourself, then a SEP makes sense.
Just remember that you will have to make the same contribution for every employee that you put in your own account each year. This is why SEP plans are mostly used by companies with a small number of eligible employees.
If you make several hundred thousand dollars a year, you have the income and the future expectations to consider a defined-benefit Keogh plan. It’s basically a fund-your-own-pension program with tax savings rolled in.
If you got this far and realize that neither of these plans exactly fits your needs, you might consider a solo, traditional, or Roth 401(k) plan. If you prefer a defined benefit, look into a 412(e)(3) plan.
Who Is Eligible for a SEP?
Individuals who are eligible for a SEP include employees who are 21 years of age or older, have worked for a company for at least three of the last five years, and have been paid at least $750 in compensation in 2025 (increasing to $800 in 2026).
Can Anyone Open a SEP IRA?
Not everyone can open a SEP IRA. Only business owners who have one or more employees and individuals who work freelance can open a SEP IRA. Contributions go directly into a traditional IRA that has been created for the employee.
Is a Keogh Plan the Same as a 401(k) Plan?
A Keogh plan is not the same as a 401(k) plan, but it is similar. A Keogh plan is a tax-deferred plan like a 401(k), but the contribution limit is higher, and Keogh plans are for self-employed individuals and unincorporated businesses.
The Bottom Line
SEP and Keogh plans are both beneficial for small business owners seeking to boost retirement savings.
SEPs are simpler, with fewer documentation and contribution requirements, making them suitable for businesses with a small number of eligible employees.
Keogh plans offer higher contribution limits, especially beneficial for high earners, but come with more complexity and documentation requirements.
Employers using SEP must match their contributions to each eligible employee, whereas Keogh plans can be structured flexibly as defined benefit or contribution plans.
Consider alternative plans like a solo 401(k) or Roth 401(k) if neither SEP nor Keogh plans meet your needs.
Correction—Dec. 2, 2021: A previous version of this article referred to a 412(i) plan. 412(i) plans were replaced by 412(e)(3) plans in 2007.