The Weekly Scenario: SEP IRA vs. SIMPLE IRA
Question: What is the difference between a SEP IRA and a SIMPLE IRA?
Answer: A SEP IRA is a traditional IRA program that can be adopted by self-employed individuals or small business owners. Contributions are made on an annual basis and are fully vested when made. Contributions are tax-deductible (for the business).
But contributions do not have to be made each plan year (and payments do not have to be the same each year).
For small businesses with employees, the maximum contribution that can be made for each employee is the lesser of 25% of compensation or the dollar limit (indexed) for the year [$55,
000 for 2018].
SIMPLE IRAs can also be adopted by the self-employed. A business can only adopt this plan if it had 100 or fewer employees who earned $5,000 or more during the previous calendar year (it is the only employer-sponsored plan).
Unlike SEP IRAs, SIMPLE IRAs allow employees to make salary deferrals. For 2018, the salary deferral limit is $12,500 (an additional $3,000 catch up contribution for anyone age 50 or older is permitted). SIMPLE IRAs require an annual employer contribution that is fully vested when made. The annual employer contribution must generally be a matching contribution (not to exceed 3% of comp).
Comment: The SIMPLE IRA has two important disadvantages to the SEP IRA. First, the maximum contribution amount is generally lower than a SEP IRA and an employer contribution is required each year.
As always, if you have any questions or would like to learn more, please let me know.
As always, if you have any questions or would like to learn more, please contact Steve Shane at firstname.lastname@example.org or .
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