Types of IRAs Compared: Traditional, Roth, SEP, and SIMPLE

The four main types of IRAs compared here — Traditional, Roth, SEP, and SIMPLE — split cleanly into two groups. Traditional and Roth are individual accounts anyone with earned income can open, capped at $7,500 in 2026, and they differ mainly on when you pay tax: Traditional gives you a deduction now and taxes withdrawals later, while Roth takes after-tax dollars now and pays out tax-free in retirement. SEP and SIMPLE are employer-sponsored plans built for self-employed people and small businesses, and they allow far larger contributions in exchange for more rules about who has to be covered.

Snapshot of the Four IRAs for 2026

Before working through each account, it helps to see the basics side by side.

Traditional IRA: anyone with earned income. Contribution limit $7,500 ($8,600 if age 50+). Contributions may be tax-deductible; withdrawals are taxable.¹
Roth IRA: anyone with earned income under the income limits. Same $7,500 / $8,600 cap, shared with Traditional. Contributions are after-tax; qualified withdrawals are tax-free.
SEP IRA: self-employed people and small business owners. Employer-funded only, up to the lesser of 25% of compensation or $72,000.²
SIMPLE IRA: businesses with 100 or fewer employees that don’t sponsor another plan. Employees can defer up to $17,000, plus a $4,000 catch-up at 50+ and a $5,250 super catch-up at ages 60–63; the employer must contribute too.

The $7,500 Traditional/Roth cap applies across both accounts combined. Split $5,000 into a Traditional and only $2,500 can go into a Roth in the same year. A non-working spouse in a joint-filing household can also contribute up to the full IRA limit as long as the working spouse’s earned income covers both contributions.³

Traditional IRA

A Traditional IRA gives you the tax break up front. Contributions come out of pre-tax income and lower your taxable income for the year you make them.⁴ You’ll owe ordinary income tax on every dollar you withdraw later. That trade works well if you expect to be in a lower tax bracket after you stop working.

Anyone with earned income can contribute regardless of income level. What income does affect is the deduction, and only when you or your spouse is covered by a workplace retirement plan. For 2026, the deduction phases out over these ranges of modified adjusted gross income:¹

Single filer covered by a workplace plan: $81,000 to $91,000.
Married filing jointly, contributing spouse covered: $129,000 to $149,000.
Married filing jointly, spouse covered but you aren’t: $242,000 to $252,000.
Married filing separately, covered by a plan: $0 to $10,000.

If neither you nor your spouse has access to a workplace plan, the full deduction is available at any income. Even when you’re above the phase-out, you can still make nondeductible contributions. You lose the current-year deduction, but the money grows tax-deferred, and nondeductible contributions are also the foundation of the backdoor Roth strategy discussed further down.

Roth IRA

A Roth IRA runs the tax timing in reverse. Contributions go in with after-tax dollars, so there’s no deduction. In retirement, qualified withdrawals — contributions and all the investment growth — come out tax-free.⁵ Roth tends to win when you expect your tax rate in retirement to be the same or higher than it is now.

Unlike the Traditional IRA’s deduction limits, the Roth income limits control whether you can contribute at all. For 2026:¹

Single or head of household: full contribution below $153,000; reduced from $153,000 to $168,000; none above $168,000.
Married filing jointly: full below $242,000; reduced from $242,000 to $252,000; none above $252,000.
Married filing separately: reduced from $0 to $10,000; none above.

Contributing above the limit triggers a 6% excise tax on the excess each year it stays in the account. Pulling the excess plus attributable earnings out before your filing deadline avoids the penalty.

Access to Contributions and the Five-Year Rule

Roth contributions can come back out at any time, for any reason, without tax or penalty, because they were already taxed on the way in. Earnings are treated differently. For earnings to come out tax-free, the withdrawal must be a qualified distribution: you must be at least 59½ (or meet another exception like disability or a first-time home purchase up to $10,000), and at least five tax years must have passed since your first Roth contribution.⁵ The five-year clock starts January 1 of the year of your first contribution. Opening a Roth early, even with a small amount, starts that clock.

SEP IRA

The SEP IRA is built for self-employed people and small business owners who want to sock away more than $7,500. Only the employer funds it; employees cannot make salary deferrals into a SEP.² For 2026, contributions are capped at the lesser of 25% of the employee’s compensation or $72,000, with compensation counted only up to $360,000.

If you’re self-employed, the calculation is a little different: you subtract half of your self-employment tax first and then apply the contribution percentage to that reduced figure, which effectively caps the rate at roughly 20% of net self-employment income.

One rule catches many small business owners off guard. The contribution percentage has to be uniform across everyone eligible. Contribute 15% for yourself and you contribute 15% for every eligible employee too. An employee is eligible if they’re at least 21, have worked for you in three of the last five years, and earned at least the minimum compensation amount set by the IRS.⁴ Contributions are tax-deductible for the business and grow tax-deferred in each employee’s individual account.

SIMPLE IRA

The SIMPLE IRA fits businesses with 100 or fewer employees that don’t sponsor another retirement plan. Unlike a SEP, employees can defer part of their own salary. For 2026, an employee can defer up to $17,000, plus a $4,000 catch-up at age 50 and older.¹ Employees aged 60 through 63 can defer an extra $5,250 under a SECURE 2.0 enhanced catch-up. That super catch-up doesn’t apply to Traditional or Roth IRAs.

The employer has to pick one of two contribution formulas each year:

A dollar-for-dollar match up to 3% of each participating employee’s compensation. This can be reduced to as low as 1%, but no more than two out of any five years.
A 2% non-elective contribution for every eligible employee, whether or not the employee defers anything, calculated on compensation up to $360,000 for 2026.

Employees have to be told which formula applies during a 60-day election window before the start of the plan year. To be eligible, an employee generally must have earned at least $5,000 in any two prior calendar years and be reasonably expected to earn that much in the current year.

The SIMPLE trades a lower ceiling for lower administrative burden. There’s no annual Form 5500 and no compliance testing. For a very small business where the owner doesn’t need to shelter more than about $17,000 to $21,000 a year plus the employer piece, that simplicity often outweighs the lower cap.

How to Choose Between Them

The right account usually falls out of a few facts about your situation.

If you have a regular W-2 job and want individual retirement savings, the choice is Traditional versus Roth. Pick Traditional if you want the deduction now and expect a lower tax rate in retirement, or if your income puts you above Roth eligibility. Pick Roth if you want tax-free income later, expect the same or higher tax rate down the road, or value the flexibility of pulling contributions back out without penalty. Nothing stops you from using both across different years.

If you’re self-employed with no employees and want to shelter well beyond $7,500, a SEP is the simplest higher-limit option. If you run a small business with employees who want to defer their own salary and you’re willing to match or contribute 2% for everyone, a SIMPLE fits. A SEP and a SIMPLE can both coexist with a personal Traditional or Roth IRA, subject to the usual deduction and income rules.

Early Withdrawals and RMDs

All four IRAs discourage withdrawals before age 59½ with a 10% additional tax on the taxable portion, on top of any regular income tax owed.⁶ For Traditional, SEP, and SIMPLE IRAs, the whole withdrawal is generally taxable. For a Roth, only the earnings portion is taxable and penalized.

SIMPLE IRAs carry an extra hit early on. Withdraw within two years of your first contribution to any SIMPLE plan maintained by your employer and the 10% penalty jumps to 25%.⁶ After two years, it drops back to 10% until you reach 59½.

Several exceptions let you skip the 10% penalty even before 59½, including up to $10,000 for a first-time home purchase, higher education expenses, health insurance premiums after a job loss with at least 12 weeks of unemployment compensation, substantially equal periodic payments, and disability or death.⁷ SECURE 2.0 added a domestic-abuse exception (lesser of $10,000 or 50% of the account), a once-per-year $1,000 emergency personal expense distribution, and up to $22,000 for federally declared disasters.

Once you’re older, the tax code flips and forces withdrawals from most of these accounts. Required Minimum Distributions from Traditional, SEP, and SIMPLE IRAs must begin by April 1 of the year after you turn 73, for anyone reaching 73 before January 1, 2033; the age rises to 75 for people turning 74 after December 31, 2032.⁸ Missing an RMD costs 25% of the shortfall, dropping to 10% if you correct it within the window set by the IRS.⁹

The original owner of a Roth IRA never has to take RMDs.⁵ The money can keep compounding tax-free for life, which is one of the clearest reasons to lean Roth if you don’t expect to need every dollar in retirement.

Backdoor Roth for High Earners

If your income disqualifies you from contributing directly to a Roth, a two-step workaround is available. Contribute to a nondeductible Traditional IRA, then convert those dollars to a Roth. Since the contribution wasn’t deducted, the conversion itself creates little or no additional tax. This is legal and widely used.

The catch is the pro-rata rule. The IRS treats all your Traditional, SEP, and SIMPLE IRA balances as one pool when calculating tax on a conversion. If you already hold $93,000 of pre-tax money in a rollover IRA and try to convert a $7,000 nondeductible contribution, roughly 93% of the conversion becomes taxable. To make a clean backdoor Roth, either start with no pre-tax IRA balances or first roll those balances into a 401(k) that accepts incoming rollovers. Report the nondeductible contribution and the conversion on IRS Form 8606.¹⁰

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
3
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
4
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
5
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
6
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
7
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
8
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
9
Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
10
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions