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SDIRA Concepts

Understanding Retirement Options for Your Small Business: SEP IRA vs. SIMPLE IRA

March 24, 2020

SIMPLE IRA plan

Summary: Savings Incentive Match Plan for Employees allows employees and employers to contribute to traditional IRAs set up for employees.

Who is a SIMPLE plan good for?

It is ideally suited as a start-up retirement savings plan for small employers (100 or fewer employees) not currently sponsoring a retirement plan. With a SIMPLE plan, contributions are tax-deductible, and earnings within the account are tax-free until withdrawn. Employees are also 100% vested, which means they are able to take all funds, including employer contributions, with them if they leave.

Advantages:

  • Flexibility for employers to choose to match employee contributions or the employer can contribute a fixed percentage of eligible employees’ pay
  • Ease for the employer: A SIMPLE IRA is simple to set up and maintenance is typically more affordable than other options and there are generally no filing requirements with the IRS
  • Tax-deductible contributions as well as tax benefits when employees withdraw from the account in retirement

Who can and cannot participate in a SIMPLE?

You can establish a SIMPLE IRA plan if you meet BOTH of 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 can establish a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year.

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.

SIMPLE IRA contribution limits

A SIMPLE IRA allows:

  • Employee contributions in 2019 of up to $13,000 if you are under age 50, and a catch-up contribution of up to $16,000 if you are 50 or older.
  • Employee contributions in 2020 of up to $13,500 if you are under age 50, and a catch-up contribution of up to $16,500 if you are 50 or older.

Employers are generally required to match each employee’s salary reduction contributions, on a dollar-for-dollar basis, up to 3 percent of the employee’s compensation. You can deduct SIMPLE IRA contributions for the tax year within which the contributions were made.


Another option: The Solo 401(k)

If you are the sole proprietor of your business, you and your spouse may qualify for the Solo 401(k) option, which combines elements of the SEP and SIMPLE plans.

This option offers higher contribution amounts and possible tax deductions. However, there are precise qualifications that must be met in order to be eligible. Learn more about the Solo 401(k) and see if you qualify.

For more information about the difference between these plans, Equity Trust National Education Specialist John Bowens simplifies what you need to know in this whiteboard session:

Guide to SEP IRA and Taxes

Guide to SIMPLE IRAs and Taxes

 

Equity Trust holds a variety of IRAs, as well as other self-directed accounts, including:

  • Traditional IRA
  • Roth IRA
  • Simple IRA
  • SEP IRA
  • Solo 401(k)
  • Roth Solo 401(k)
  • Health Savings Account (HSA)
  • Coverdell Education Savings Account (CESA)

A self-directed IRA is a retirement account that allows for investments in alternative assets such as real estate, promissory notes, and precious metals, in addition to stocks and mutual funds. The account owner determines how they would like to manage their account and directs the custodian to process the transactions within the account. In addition to Traditional and Roth IRAs, other accounts such as SEPs, SIMPLEs, Solo 401(k)s, health savings accounts, and Coverdell education savings accounts can be self-directed as well.


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