SEP IRA vs SIMPLE IRA

Simplified employee pensions (SEPs) and savings incentive match plans for employees (SIMPLEs) are two of the most popular retirement plans designed for small businesses and self-employed individuals. SEP and SIMPLE plans offer significant benefits for small businesses, especially since they are easy to administer and require very little paperwork on the part of the business owners.


SEP IRA vs. SIMPLE IRA plans


When comparing SEP vs. SIMPLE IRA plans, it’s important to note that while both are designed for small businesses and their employees, SIMPLE IRAs are only available to companies that employ no more than 100 employees making $5,000 or more each year. SEP IRAs offer slightly more flexibility, but limit the use of leased employees by participating companies; both SEP and SIMPLE plans must generally be the only retirement plan offered by the company. SEP IRAs must cover all employees 21 years of age or older who have worked for the company in three of the last five years and have earned at least $500 in each qualifying year.

One major difference in SEP IRA vs. SIMPLE IRA plans is the way in which contributions are made. SEP IRAs allow employers to provide up to 25% of an eligible employee’s salary in contributions each year up to a maximum contribution of $49,000 for the 2009 tax year; these contributions are voluntary and can be reduced, increased, or discontinued by the company at any time. Employers who offer SIMPLE IRA plans to their employees are allowed to match contributions up to 3% of the employee’s salary or to make contributions of up to 2% of the employee’s salary, depending on the specific plan and contribution level selected. Whatever percentage level is chosen, it must be applied equally to all eligible employees. Under normal conditions, SIMPLE IRA contributions are limited to $11,500; $2,500 catch-up contributions are allowed for older employees who are nearing retirement age.

Both SEP and SIMPLE IRA contributions are tax-deferred; this means that no taxes are due on these contributions until they are distributed either at retirement or under special circumstances prior to that time. Companies who are deciding on SEP IRA vs. SIMPLE IRA plans for their employees should carefully weigh the advantages and restrictions of these accounts in order to determine which plan best meets their needs. SEP IRA plans offer superior flexibility for employers, since they can be discontinued or reduced depending on the current financial situation of the company. SIMPLE IRAs are more restrictive in their requirements, but typically allow employees to take a more active role in planning for their own retirement; this makes them an attractive choice for companies that want to allow their employees more autonomy in making these important financial decisions.
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