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By Bill Filer - October 16, 2018
Small business owners play many roles: boss, accountant, payroll processor and human resources professional. Name the character and you likely play it. One position that's vital is retirement plan sponsor. Fulfilling that role with a SEP or SIMPLE IRA may give your business and employees tax-saving benefits.
While there are several retirement plan options available, two may be easier to manage: SEP IRAs and SIMPLE IRAs. Both can help you and your employees build up savings for the future. They are also designed to offer tax advantages for you, your employees and your business.
There are differences between the two (shown below), and those can help you decide which one may be right for your business.
Flexibility is one key concept of a SEP IRA. Business experiencing lean profits one year? You can forego a SEP IRA contribution. As an employer, you decide which years to contribute and which ones not to. However, that also means you won't get the business tax deduction in years you don't contribute.
In addition, SEP IRAs are low cost, easy to set up and maintain, and offer higher contribution limits than some other retirement plans. You also don't have to file additional paperwork with the IRS to maintain your plan.
It's in the name. SIMPLE IRAs are frankly one of the simplest plans to manage. In many ways, they act like a 401(k) with employee salary deferrals and potential employer matching—but with much less effort and usually less expense. There is no annual IRS filing, no compliance testing and no need for a costly third party to help administer the plan.
Employers can also decide whether they want to match employee contributions or contribute a flat percentage rate each year. But you must do one or the other; you cannot opt out like you can with a SEP.
SEP and SIMPLE IRAs provide more benefits for small business owners and employees, including:
Like just about everything related to taxes and your business, there are deadlines for opening a SEP IRA or SIMPLE IRA.
Once you establish your retirement plan, you should consider regular contributions. Contributing to a SIMPLE IRA is mandatory, so you know you'll be making that a habit. However, even with the contribution flexibility allowed by a SEP IRA, you might as well take advantage of the tax savings every year, if you can.
Many owners wait until their Tax Day (plus extensions) to contribute. Smaller contributions throughout the year may be easier than coming up with one larger sum at tax time. Whichever way you choose, your future will thank you, your employees will thank you and maybe even your accountant will thank you.
Discover more about SEP and SIMPLE IRAs, as well as other workplace retirement plans.
Or contact a Business Retirement Specialist at 1-800-345-3533 and get help choosing the right plan.
Learn how providing a SEP IRA or SIMPLE IRA could power up your small business—and its employees—with tax benefits.
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The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for early withdrawal before age 59½.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.