Self-Employed? Small Business Owner? Consider These Retirement Plans Designed Just for You

By Elsie Dudukovich0 Comments

If you’re a small business owner who feels creating and maintaining a 401(k) is a daunting task, consider the SEP or SIMPLE retirement plan options.

What is a SEP?
The Revenue Act of 1978 implemented the Simplified Employee Pension IRA (SEP-IRA), which provided for a contributory retirement account designed for small businesses (typically with up to 25 employees) and the self-employed. An employer may contribute up to 25 percent of each employee’s annual compensation.

Contributions to a SEP are tax deductible, and earnings within the account are tax-free until withdrawn.

For the self-employed and small business owners, the amount they can save in a SEP IRA remains at $53,000 for 2016 – the same as the 2015 contribution limit – and is based on a percentage of their salary.  The compensation limit used in the savings calculation remained the same as the 2015 limit of $265,000.

SEP Eligibility
Any employer—whether a corporation, partnership, or self-employed individual—may establish the plan, even if there is only one employee. Employees must meet ALL of the following requirements:
  • Be at least 21 years of age
  • Have worked for the business during any three of the past five years
  • Have earned a minimum of $600 in compensation 
Spouses and children may also participate in the plan and open their own SEP IRAs—as long as they are employees of the company and meet the income requirements.

What is a SIMPLE?
The 1996 Small Business Job Protection Act saw the implementation of the Savings Incentive Match Plan for Employees (SIMPLE IRA), which provided for employer matching and contributions to the employee plans.  This act also increased the amount for Spousal IRA contributions from $250 to the annual limit (at that time, $2,000).

The SIMPLE IRA was designed to provide a retirement plan for small businesses with 100 or fewer employees who have no other qualified plans.  Similar to a Traditional IRA, contributions in a SIMPLE are tax deductible within the year they were made and earnings within the account are tax free until withdrawn.

The 2016 SIMPLE IRA employee contribution limit is $12,500 if you are under age 50 and a catch up contribution of up to $15,500 if you are 50 or older in 2016.  Employers are generally required to match each employee's salary reduction contribution, on a dollar-for-dollar basis, up to 3 percent of the employee's compensation.

SIMPLE Eligibility
You can establish a SIMPLE IRA plan if you meet the following requirements:
  • You meet the employee limit
  • You do not maintain another qualified plan, unless the other plan is for collective bargaining employees
  • You have 100 or fewer employees who received $5,000 or more in compensation from you for the preceding two year period. Under this rule, you must take into account all employees who were employed at any time during the calendar year, regardless of whether they're eligible to participate.
The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year in which the SIMPLE IRA plan becomes effective.

For more information or to find out which plan makes sense for you, schedule a free one-on-one consultation with a Senior Account Executive.