When it comes to saving for retirement, most everyone has heard of the 401(k) and the IRA. If you’re a small business owner, or if you plan to be at some point in the future, I want to bring your attention to two other retirement plans with two important benefits:

Higher Contributions – these plans may allow you to defer more income than a traditional IRA.
Simplicity – these plans are easier and less expensive to set up and administer than a 401(k).

The plans I refer to are called the Simplified Employee Pension (SEP) and the Savings Incentive Match Plan for Employees (SIMPLE). Don’t let their intimidating names fool you, these two retirement plans are as simple as they come.

You may have heard of SEPs and SIMPLEs at some point or even had someone recommend you establish one. This post will give you a better idea if one of these plans could be a good fit for your business.

Comparing the Plans

	SEP	SIMPLE
Setup and Maintenance	Very simple setup and annual filing requirements
Tax Deductibility	Employer contributions are tax deductible
Vesting Schedule	All contributions are immediately 100% vested
Loans	Unlike 401(k)’s, participants cannot borrow against plan balances
Employee Contributions	None	Up to $12,500, tax deferred
Employer Contributions	Discretionary up to 25% or $53,000, whichever is less. * Must be pro-rata to all eligible employees.	Required match up to 3% Or Flat 2% contribution to all eligible employees
Eligible Employees	Age > 21 Earnings > $600 Employed 3 of last 5 years	>$5,000 compensation in current and 2 preceding years
Company Size	Any	Up to 100 employees
Deadlines	Tax filing date, including extensions	Typically, October 1^st due to 60-day election period requirement

*For self-employed individuals with pass-through income, the maximum contribution is 20% of net adjusted self-employment income.

Choosing a Plan

As with most financial decisions, there’s not a clear cut winner between the SEP and the SIMPLE – it all depends on your situation and goals. Here are a few things to consider:

Maximizing Contributions – if you have a reasonably high income, in most cases you will be able to contribute more under a SEP, due to the higher limit. However, keep in mind that if you have eligible employees, you will have to contribute the same percentage of their salaries as you do your own.
Flexibility – if your business has large swings in cash flow from year to year and you don’t want to be compelled to make contributions, the SEP may be a better option since the SIMPLE requires either a match or a 2% flat contribution to eligible employees.
Employee Participation – Do you want your employees to have some skin in the game? A SIMPLE may be more appropriate since the SEP doesn’t allow for employee contributions.
Timing – If you are looking to defer some income from last year and you haven’t filed taxes yet, you can still set up and contribute to a SEP, but not a SIMPLE.

Getting Started

If you are a business owner looking to defer more income than a Traditional IRA will allow and/or you want to provide a retirement option for your employees that is both simple to set up and easy to administer, a SEP or SIMPLE may be just the solution for you.

I can help you decide if one of these options makes sense for your business as well as take care of the setup and management of your plan.

To schedule a complimentary, no-obligation introduction click here.