SR Client Question – What is the difference between a SEP IRA and a SIMPLE IRA?

SEP IRAs (simplified employee pension individual retirement arrangement) and SIMPLE IRAs (savings incentive match plan for employees individual retirement arrangement) are retirement plan options geared toward small businesses.  Both types of plans are easy to administer and require no annual reporting to the IRS.  However, there are differences to consider in determining which is best for your business.

Employer Contributions:

  • With an employer sponsored SEP IRA, the employer is allowed to contribute up to $51,000 for 2013 or 25% of the employees taxable compensation.  The percent of compensation contributed is determined on an annual basis by the employer, so it could be based on the performance of the company.
  • With a SIMPLE IRA, the employer has two options for contributions.  The first option would be to match dollar for dollar up to 3% of each employee’s compensation or $12,000 in 2013, whichever is less.  The second option would be to contribute 2% of each employee’s compensation up to $255,000.

Note that with the first option the employer matches contributions made by employees, so if an employee does not contribute, the employer match is zero.  But with the second option the employer would be required to fund contributions for all employees regardless of whether or not they contribute to the plan.

Employee Contributions:

  • In a SEP IRA contributions are typically made by the employer.  However, employees have the option to make a traditional IRA contribution with after tax dollars into the SEP IRA plan.  This contribution is limited to the smaller of $5,000 or taxable compensation.  If over age 50, the limit increases to $6,000.
  • In a SIMPLE IRA employee contributions are made pretax and employees could contribute up to $12,000.  If over age 50, the limit increases to $14,500.

You must also consider if the business has any other types of retirement plans.  With SEP IRA’s the employer may offer other types of retirement plans, but this is not allowed with a SIMPLE IRA plan.  Also, if interested in starting a SIMPLE IRA, it must be established by October 1st to be in effect for that particular year.

What type of retirement plan is best for your business can be difficult to determine.  Be sure to consult your business advisor at ShindelRock to help you weigh the options that are best for you.