Retirement accounts do more than just pull portions of your wages away every two weeks in the hopes of someday supporting your Golden Years. A successful business should complement its existing operation with the correct benefits program to make sure the workforce and company are maximizing the opportunity for immediate and long-term positive results.
Many Small Business owners do not fully understand the benefits and differences between SEP IRA and SIMPLE IRA accounts. In order to maximize the long term growth potential for business revenue and employee earnings, it is essential that you understand the differences between Simplified Employee Pension (SEP) Plans and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, and align your existing benefits offering with the correct retirement plan for your business and staff.
Looking for a low-cost way to save for retirement?
A SEP IRA may offer the solution…
SEP Plans can offer business owners and employees a significant source of income at retirement by allowing employers to put money aside in retirement accounts for themselves and their employees. With a SEP, an employer contributes directly to SEP-IRA accounts for all employees (including themselves). A SEP is easier to set up and usually has lower operating costs than most conventional retirement plans, and allows for a contribution to each employee of up to the lesser of 25% of the employee’s pay or $57,000.
Pros & Cons | Simplified Employee Pension Plans (SEPs)
Contributions to a SEP are tax deductible and your business pays no taxes on the earnings on the investments.
You are not locked into making contributions every year. You (business) decide each year whether to make a contribution and, if so, how much to contribute..
In most cases, you do not have to file any documents (e.g. Form 5500) with the government.
Corporations, including S/C Corps, LLCs, Sole Proprietors, and Partnerships can set up SEPs.
You may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting the plan.
Administrative costs are low.
No Loan Permitted from Plan
No vesting schedule is permitted. Employees are immediately 100% vested in contributions.
Contributions an employer can make to an employee’s SEP IRA cannot exceed the lesser of:
1. 25% of the employee’s compensation, or
2. $57,000 for 2020 ($56,000 for 2019).
A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) allows both employers and employees to contribute to a retirement account set up for employees. It is ideally suited as a start-up retirement savings plan for small employers (under 100 employees) not currently sponsoring a retirement plan.
Pros & Cons |Savings Incentive Match Plan for Employees (SIMPLE)
Easy and inexpensive to set up and operate
Employees share responsibility for their retirement
No discrimination testing required
Generally, an employer has no filing requirements
You MAY be eligible for a tax credit of up to $500 dollar per year for the first 3 years.
Inflexible Contributions.
Lower contribution limits than other retirement plans.
Participant loans are not permitted. The assets may not be used as collateral (in-service withdrawals are permitted including taxes and any fees if under age 59 ½)
SIMPLE IRA contributions include:
1. Salary Reduction contributions and
2. Employer contributions required: a) matching contributions or b) non elective contributions.
The amount an Employee contributes from their salary cannot exceed $13,500 in 2020 ($13,000 in 2019 and $12,500 in 2015-2018). Catchup contributions are permitted for those ago 50 and over ($3,000 in 2015-2020)
The employer is generally required to match each employee’s salary reduction contribution on a dollar-for-dollar basis up to 3% of eligible compensation. Instead of this matching contribution, an employer can choose to make nonelective contributions of 2% of each eligible employee’s compensation.
Employers must deposit employee’s salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the employee would have received them in cash (paycheck).
About the Author:
Adam Angibeau, CFP® is a Certified Financial Planner, Financial Advisor, and Vice President of NS Capital with over a decade of experience in the financial industry. Adam provides asset management and portfolio construction services for individuals and small businesses that are looking for a different approach to having their assets managed. Throughout his career, has had the privilege of advising hundreds of clients throughout the greater Tri-State area to help them achieve their long-term financial goals. Feel free to write to Adam at aangibeau@nscadvisor.com with any questions or comments.
Disclaimer: The preceding article is for discussion purposes only and does not represent the full details on the subject matter. The author and NS Capital LLC are not responsible for regulation changes which may deem this information outdated or incorrect. Readers are encouraged to contact their CPA, Financial Advisor or HR Consultant for more information.
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