SEP or SIMPLE? What Does That Have to Do with My IRA?

SEP IRA’s (simplified employee pension individual retirement arrangement) and SIMPLE IRA’s (savings incentive match plan for employees individual retirement arrangement) are retirement plan options geared toward small businesses.  Both types of plans are easy to administer and require no annual reporting the IRS.  However, there are differences to consider in determining which is best for your business.

Employer Contributions

With an employer sponsored SEP IRA, the employer is allowed to contribute up to $53,000 for 2016 or 25% of the employees taxable compensation.  The percent of compensation contributed is determined on an annual basis by the employer, so it could be based on the performance of the company.  With a SIMPLE IRA, the employer has two options for contributions.  The first option would be to match dollar for dollar up to 3% of each employee’s compensation or $12,500 in 2016, whichever is less.  The second option would be to contribute 2% of each employee’s compensation up to $265,000.  (Note that with the first option the employer matches contributions made by employees, so if an employee does not contribute, the employer match is zero.  But with the second option the employer would be required to fund contributions for all employees regardless of whether or not they contribute to the plan.)

Employee Contributions

In a SEP IRA contributions are typically made by the employer.  However, employees have the option to make a traditional IRA contribution with after tax dollars into the SEP IRA plan.  This contribution is limited to the smaller of $5,500 or taxable compensation.  If over age 50, the limit increases to $6,500.  In a SIMPLE IRA employee contributions are made pretax and employees could contribute up to $12,500.  If over age 50, the limit increases to $15,500.

You must also consider if the business has any other types of retirement plans.  With SEP IRA’s the employer may offer other types of retirement plans, but this is not allowed with a SIMPLE IRA plan.  Also, if interested in starting a SIMPLE IRA, it must be established by October 1st to be in effect for that particular year.

Everyone’s situation is different and unique.  At Secure Planning Strategies, we understand that the various types of retirement plans are difficult to navigate as we protect your future security.  We can help determine what retirement plan will work best for you and your business.  Give us a call so we can support your future wealth portfolio at: (248) 827-2580 or e-mail us at info@spsfinancial.com.