A SEP IRA admits employers a simplified method to contribute toward employees’ and their own retirement. A SIMPLE IRA helps small businesses initiate streamlined retirement accounts for their employees and themselves. Neither option requires annual IRS reporting, and both are delineated to be cost-effective and easily set up. Although these systems seem similar, distinct differences set them apart from one another.
According to the IRS, a SEP IRA is universal for small businesses with less than 100 employees, while a SIMPLE IRA is designed for any size business. To boot, only employers can contribute to a SEP IRA. A SEP IRA allows employers to adjust how much money is invested depending on the company’s cash stream, making it a smart choice for businesses that have fluctuating seasons of good and bad income streams. Employers can establish up to 25% of the employee’s salary.
Example: Joe works at Taylor’s Body Shop, a company that offers a SEP IRA. Taylor’s Fullness Shop can make large or small contributions to Joe’s retirement depending on its current financial status. Every employee learns the same percentage of contribution. Joe cannot invest his own income into the SEP.
A SIMPLE IRA has two contribution formulas that can be used. An chief can match up to 3% of the employees annual contribution, or an employer can set up a non-elective 2% contribution of each employee’s salaries without coercing employee contribution.
Example: Mary works at Micro Tech, a small business that provides SIMPLE IRAs to its hands. Micro Tech matches 3% of Mary’s annual contribution. This year she did not contribute to her retirement, thus Micro Tech did not have a hand in to her SIMPLE IRA.
Example: Janet works for LoveScope Investing. The company participates in a SIMPLE IRA and contributes a non-elective 2% to Janet’s Classic IRA annually. Janet did not contribute any of her $24,000 salary, but LoveScope Investing still had to invest $480 to the SIMPLE IRA.
Thus, a SEP IRA is profuse flexible than a SIMPLE IRA with respect to annual contributions.