Should I Establish A SEP IRA Or A Simple IRA Plan For My Small Business?
As a business owner, you may be searching for retirement plan options that benefit both you and your employees, without incurring burdensome costs or administrative complexity. SEP and SIMPLE IRAs can be great alternatives to 401(k)s, each offering attributes that could be attractive, depending upon your specific circumstances. However, comparing these two options can be difficult, as there are multiple factors to weigh.
To assist in this decision-making process, we have created the “SEP vs. SIMPLE IRA” flowchart. This flowchart considers several pertinent factors, including your business owner goals and preferences, the size of your business and employee headcount, and the employer and employee ability to contribute.
One key factor to consider is contribution minimums and limits. A SEP IRA may be more appropriate if you have a larger business and want to make significant contributions, as there are no annual contribution limits. A SIMPLE IRA, on the other hand, may be more appropriate if you have a smaller business and want to limit your contribution amounts.
Another factor to consider is your ability to contribute as an employer and your employees' ability to contribute. A SEP IRA allows employers to contribute up to 25% of employee compensation, while a SIMPLE IRA allows employers to contribute up to 3% of employee compensation or match employee contributions up to 3%. Employees can also contribute up to a certain amount each year.
Your business owner goals and preferences should also be considered. A SEP IRA may be more appropriate if you are looking for flexibility in contribution amounts and do not want to be locked into a specific contribution amount each year. A SIMPLE IRA, on the other hand, may be more appropriate if you are looking for simplicity and ease of administration.
Overall, the decision between a SEP IRA and a SIMPLE IRA depends on several factors, including the size of your business, your ability to contribute as an employer and employee, and your business owner goals and preferences. This flowchart can help guide you through the decision-making process and identify the best retirement plan option for you and your employees.
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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.