Legal Blog
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 sshane@offitkurman.com or .
ABOUT STEVE SHANE
Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
ABOUT OFFIT KURMAN
Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With over 170 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our eleven offices serve individual and corporate clients in the Virginia, Washington, DC, Maryland, Delaware, Pennsylvania, New Jersey, and New York City regions. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.
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