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SIMPLE IRA vs. SEP IRA

SIMPLE IRA vs. SEP IRA

| March 23, 2021
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Running a business can be extremely time consuming. With endless decisions that need to be made, designing and implementing a retirement plan that is best for you and your employees can seem complicated and overwhelming. However, it doesn’t have to be that way, as business owners and those who are self-employed have multiple options for setting up a retirement plan for themselves and their employees. Two common routes that are low cost and easy to operate are SIMPLE IRAs and SEP IRAs.

SEP IRA:

  • Established by sole proprietors, partnerships, and corporations (including S-Corps).
  • No plan filing with the IRS. These are self-administered plans.
  • Eligible employees (Employee contributions are not allowed in a SEP):
    • Age 21 (or older), who have worked for their employer in 3 of the last 5 years and earned at least $650 in 2021.
    • Employees are immediately vested in all contributions.
    • Employees will have to establish their own SEP IRA and self-direct the investments in their account.
  • Under most circumstances, once you reach age 72, you must begin taking your required minimum distributions.
  • In-service withdrawals are allowed (included in income and may be subject to early withdrawal penalty).
  • As an employer, you have flexibility in the contributions that you can make to the plan each year. Contributions can range from 0%-25% of compensation, with a maximum amount of $58,000 for 2021. The percentage that you choose to contribute must be the same for all employees.
  • Easy to operate, low cost, flexibility with annual contributions (must be equal for all eligible employees).

SIMPLE IRA:

  • Available to any small businesses – generally with 100 employees or less.
  • The plan is easy to establish and there is no filing requirement for the employer. These are self-administered plans.
  • The employer cannot have another type of retirement plan in place.
  • Employer contributions – Each year, the employer must contribute one of the following:
    • 3% matching contribution (annual compensation limit does not apply).
    • 2% nonelective contributions to each employee that is eligible.
  • Employee contributions – 100% vested in all SIMPLE IRA money
    • Employees are able to contribute to the plan if they would like up to a maximum amount of $13,500 (2021), and a catch up contribution of up to $3,000 is allowed for those who are age 50+ at the end of the calendar year.
  • Simple and low cost, no testing required (discrimination), required employer contributions, contribution limits may be lower than other retirement plans.

SIMPLE and SEP IRAs are easy to handle and operate at a low cost. In addition to these two retirement vehicles, there are other retirement plan options that may be a better fit for your business. If you would like to discuss the retirement plan options available, and need help deciding which option would best fit your business, please call Tycor at 610-251-0670 to speak with one of our retirement plan advisors. Or, you may CONTACT US by email.

*While these plans are intended to be easy to establish and maintain, there are rules to follow and it is important that you seek professional guidance to avoid any pitfalls.

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