With a traditional 401 plan, you and your employees have the option to contribute money to a tax-deferred account that usually has multiple investment options. These contributions — which can be as much as $66,000 this year combined for both employee and employer match — are tax deductible. Traditional 401 plans are the most flexible of all the retirement plan options, and allow loans, protection from creditors, and the ability to contribute to after-tax Roth savings accounts.
Participants can take advantage of other 401 benefits like making catch-up contributions, borrowing from their balances, and contributing to a Roth plan. But there are a couple of drawbacks. One is that contributions are less than a traditional 401 plan. More importantly, employers are required to provide up to a 3% match for any employee contribution.
SEP plans do not require discrimination testing or having to file a separate tax return. Under this type of plan, and like a 401, you can put away up to $66,000 per participant. However, there are no catch-up contributions, your assets are not as protected as a 401, and whatever percentage of compensation you contribute for yourself, you have to make the same contribution for your participants.