Small business owners: TLDR: SEP and SIMPLE

SEP (Simplified Employee Pension) IRA and SIMPLE (Savings Incentive Match Plan for Employees) IRA are both retirement plans designed for small businesses and self-employed individuals. However, they have key differences in terms of contribution limits, eligibility, and requirements.

1. Eligibility

• SEP IRA:

  • Available to employers of any size (including self-employed individuals).

  • Employers can contribute to employees' accounts.

  • Employees cannot contribute—only employers can.

  • Employees must be at least 21, have worked for the employer in at least 3 of the past 5 years, and earned at least $750 in 2024 (indexed annually).

• SIMPLE IRA:

  • Designed for businesses with 100 or fewer employees who earned at least $5,000 in the previous calendar year.

  • Both employers and employees can contribute.

  • Employees must have earned at least $5,000 in any 2 preceding years and be expected to earn at least $5,000 in the current year.

2. Contributions

• SEP IRA:

  • Employer contributes up to 25% of employee compensation, up to a maximum of $66,000 (for 2023) per year.

  • Contributions are optional each year; employers can choose not to contribute if the business is experiencing a tough year.

  • Employees do not contribute to the plan.

• SIMPLE IRA:

  • Employees can contribute up to $15,500 (for 2023), with an additional $3,500 catch-up contribution if they are 50 or older.

  • Employers are required to contribute either:

    • A matching contribution of up to 3% of the employee's compensation, or

    • A fixed contribution of 2% of each eligible employee's compensation (whether or not the employee contributes).

3. Employer Contributions

• SEP IRA:

  • Employer contributes the same percentage of compensation for all eligible employees.

  • Contributions are discretionary and can vary from year to year.

  • Only employers make contributions.

• SIMPLE IRA:

  • Employers must either match up to 3% of the employee’s salary (which can be reduced to 1% in any two of five years) or make a 2% non-elective contribution for all eligible employees, regardless of whether they contribute.

4. Administrative Requirements

• SEP IRA:

  • Simple to set up and maintain.

  • Minimal administrative paperwork.

  • No annual filing requirements with the IRS.

• SIMPLE IRA:

  • Slightly more complex than SEP, but still fairly simple.

  • Requires employers to file IRS Form 5304-SIMPLE or Form 5305-SIMPLE when setting up the plan.

  • No annual filing requirements with the IRS.

5. Ideal for

• SEP IRA:

  • Best for self-employed individuals or small business owners who want flexible, employer-only contributions.

  • Ideal for businesses with inconsistent income or those that prefer discretionary contributions.

• SIMPLE IRA:

  • Best for small businesses with 100 or fewer employees that want employees to contribute to their own retirement plan, along with required employer contributions.

  • Suitable for businesses that want a straightforward, low-cost retirement plan but can commit to mandatory employer contributions.

6. Withdrawal Rules

• SEP IRA:

  • Same as traditional IRAs.

  • Withdrawals can begin without penalty at age 59 ½.

  • Withdrawals are subject to ordinary income tax, and early withdrawals before 59 ½ are subject to a 10% penalty (with some exceptions).

• SIMPLE IRA:

  • Same withdrawal rules as traditional IRAs.

  • However, early withdrawals within the first two years of participation in the plan are subject to a 25% penalty (rather than 10%).

7. Contribution Deadlines

• SEP IRA:

  • Employer contributions must be made by the due date of the employer's tax return (including extensions).

• SIMPLE IRA:

  • Employee contributions must be deposited into the employee’s SIMPLE IRA within 30 days after the end of the month in which they were withheld.

  • Employer contributions must be made by the due date of the employer’s tax return (including extensions).