SEPs & SIMPLEs: Power Up Your Business

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.

Power for the Future

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.

  • Employees: Retirement savings grow tax-deferred, meaning no taxes until the money is withdrawn.
  • Employers: Employer contributions are generally tax-deductible business expenses.

There are differences between the two (shown below), and those can help you decide which one may be right for your business.

  SEP IRA
Simplified Employee Pension Plan
SIMPLE IRA
Savings Incentive Match Plan for Employees
Company Size Any Size 100 employees for fewer
Amount of Paperwork Less than other plans Less than other plans
Contribution Limits 25% of employee salary, up to $56,000 for 2019 $13,000 for 2019 as employee salary deferral, plus 3% of employee salary as an employer contribution
Employer Contributions Required No Yes
Employee Salary Deferrals Allowed No--Employer provides all contributions Yes

Why a SEP IRA?

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.

Why a SIMPLE IRA?

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.

Explore More SEP and SIMPLE Strengths

SEP and SIMPLE IRAs provide more benefits for small business owners and employees, including:

 

  1. More for your future: A SEP or SIMPLE IRA allows you and your employees to save more for retirement. Contribution limits are higher than those of traditional or Roth IRAs. SIMPLE IRAs also allow for catch-up contributions for employees (and you) who are over age 50.
  2. More committed employees: Retirement plans offer a competitive advantage for hiring and retaining talented employees. According to our 6th National Survey of Retirement Savers, employees consider retirement plans one of their most important benefits. They also think more highly of companies that offer them.
  3. More profitability: Retirement plans contribute to employee financial wellness. Employees who have a plan to save for retirement are less stressed, have higher job satisfaction, experience less absenteeism and are more productive. All of these can add up to improvements to the bottom line.

Timing Is Important

Like just about everything related to taxes and your business, there are deadlines for opening a SEP IRA or SIMPLE IRA.

  • SEP IRAs: Establish by the business's tax deadline plus any extensions.
  • SIMPLE IRAs: Establish by Oct. 1 of the year the plan becomes effective.

Make Contributions Super Consistent

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.

Bill Filer
Bill Filer

Start Your Retirement Plan

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.

Start Your Retirement Plan
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