There has been a lot of conversation around the topic of SEP and SIMPLE IRAs allowing Roth contributions. Let’s start with some basic background information on both types of plans.
Overall basics of a SEP IRA
- Officially named a Simplified Employee Pension (SEP) IRA. This type of a plan is a tax-advantaged employer retirement plan designed for self-employed individuals or small business owners with very few employees. It allows for an employer to make a tax-deductible contributions to traditional IRAs for themselves and eligible participants within the plan. Contributions must be made in a uniform manner for all employees.
Overall basics of a SIMPLE IRA Plan
- Officially named a Savings Incentive Match Plan for Employees (SIMPLE IRA). This type of a plan is a tax-advantaged employer retirement plan for small businesses with 100 or fewer employees. Unlike a SEP IRA, employees are permitted to make salary-reduction contributions and employers are required to provide matching or non-elective contributions. These plans are considered the younger sibling to a 401(k). Contribution limits are not as high as 401(k) but do offer contribution limits higher than traditional IRAs and are easier and less expensive to maintain than a 401(k).
So, can a SEP or SIMPLE accept Roth (after-tax contributions)?
- In theory, yes. Under the SECURE Act 2.0 that was signed into law on December 29, 2022, Roth allowance for both of these plans were written into the act! However, it wasn’t that simple (no pun intended). It left custodians, recordkeepers and payroll providers scratching their heads as to how to make this provisional change work within their systems.
- Let’s start with SEP IRAs – since these contributions are considered Employer contributions, financial institutions have been slow to work on updating databases to allow this provision. Larger providers such as Fidelity, Vanguard, John Hancock, etc. are working on this project with no definite timeline in place. The common thread of the conversation is that “we need time to update our forms and more importantly our systems.”
- One bright hope came from Capital Group/American Funds (who desires to be an early adoptor) they hope to have further updates to share later in the year.
- What is a work around until Roth SEPs are available?
- If you are a self-employed individual and don’t have any other employees other than your spouse, you could convert a traditional SEP IRA to a Roth IRA or open a solo 401(k) with an in-plan Roth conversion option. Both require a bit of work and solo 401(k)s add an additional expense, but both are doable to accomplish the goal.
- As for SIMPLE IRAs – there is a bit more sunshine surrounding these types of plans. An early adopter right out the gate was Capital Group/American Funds through the use of the SIMPLE IRA Plus Plan. Using the chassis of their popular 401(k) platform, their SIMPLE IRA Plus Plan allows Roth employee contributions. As we have many of these plans within our book I can speak from experience that these plans work great!
What about other Providers?
- I reached out to my contact at Schwab who stated that for the 2026 plan year, their SIMPLE IRA plans can include Roth salary deferral contributions (if the employer elects that option on the plan). However, he couldn’t direct me to a form or documentation and stated that they hope to have a more “public offering” by June.
- Larger providers such as (Fidelity, Vanguard, John Hancock, etc.) have not confirmed the Roth SIMPLE provision just yet but state it’s coming.
- In case you are wondering, even with Capital Group/American Funds, the employer contributions (match and nonelective) in SIMPLE plans currently will remain pre-tax and cannot be Roth.
Summary
What’s the hold up getting providers, custodians, and payroll companies on board?
- The Mandatory Roth Catch-Up Provision has taken the front seat. This provision starting in 2026 mandates that catch-up contributions for 401(k), 403(b), and governmental 457(b) plans must be made on a Roth (after-tax) basis for employees age 50 or older who earned more than $150,000 in FICA wages from their employer in the preceding year. Pre-tax catch-ups are prohibited for these high earners.
- Providers, custodians, payroll providers, and employers have placed 100% of their efforts into making sure this provision is managed without any glitches.
- After a successful year, will Roth SEP and Roth SIMPLE IRA allowances be next on the horizon? Time will tell to see if this provision will get more attention in 2027 and 2028.
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