SEP Vs Simple IRA | Know The Differences

So, the future looms and you need to come up with a plan. As the owner of a small business you have to come up with a retirement option for your employees. They work hard and they deserve a little extra compensation for all of their time spent with you and you would like to start a retirement plan for your own future as well. As you pour through the IRA and 401k plans that are in the financial fields you will most likely stumble upon the two that have the biggest impact for small businesses: Simple IRAs and SEP IRAs. Each has its own unique advantages and disadvantages, so choosing between the two will be a completely personal decision. Let’s take a closer look at each to see SEP versus Simple IRA.

Simple IRA: To be deemed eligible for a Simple IRA you must be an employer with fewer then 100 employees. Once you crest the 100 employee maximum, at any point in the calendar year, you will be forced to upgrade to a 401k plan. The 100 employee count only includes those who meet the compensation qualifications (each has to make at least $5,000 per year) and they cannot already be in any other retirement plan.

Employers under this plan have the option of matching the employee deposits one of two ways- either by 3% dollar to dollar matching or by a 2% flat rate based on their gross income. Plus, one of the greatest things is that all contributions are tax deductible (as they go in before being taxed).

SEP IRA: With an SEP IRA employers, even those who own their own business, can benefit from an SEP retirement plan. Employees have the option of putting up to 25% of their gross income (taxable income) with a maximum of $45,000. The employer is more in control of this IRA because they can figure out how much to contribute and how often. When trying to figure out tax deductibility with a SEP IRA it will depend on which aspect you are looking at, the employee or the employer. For the employee tax deductibility will depend on how much they make each year on a modified scale. For the employer all contributions made are pre-tax, meaning they can be deducted from your taxes as non-taxed income.

If you are ready to take the next step for you and your business you should start looking into SEP and Simple IRA plans. Your employees will thank you and you will have added benefits beyond just retirement income!