SEP vs Simple IRA: Which Investment Account is Best for Your Small Business
As a small business owner or self-employed individual, selecting the right retirement plan is crucial for both your financial future and tax strategy. Two popular options are the Simplified Employee Pension (SEP) IRA and the Savings Incentive Match Plan for Employees (SIMPLE) IRA. Both plans have specific features, benefits, and contribution limits that have been updated for the 2025 tax year.
1. SEP IRA
A SEP IRA allows employers to make retirement contributions to their employees’ accounts, including their own if they are self-employed.
• Key Features:
• Only the employer makes contributions.
• Contributions are discretionary each year, providing flexibility.
• Contributions are tax-deductible for the business.
• 2025 Contribution Limits:
• Up to 25% of an employee’s compensation, with a maximum of $70,000.
• For self-employed individuals, contributions are based on net earnings from self-employment.
• Pros:
• High contribution limits are beneficial for businesses with substantial profits.
• Simple to establish and maintain with minimal administrative responsibilities.
• No annual filing requirements for the employer.
• Considerations:
• The same contribution percentage must be applied to all eligible employees.
• Employees cannot contribute; only employers make contributions.
2. SIMPLE IRA
A SIMPLE IRA is designed for small businesses with 100 or fewer employees, allowing both employer and employee contributions.
• Key Features:
• Employees can make salary deferral contributions.
• Employers are required to make either matching contributions or a fixed contribution for all eligible employees.
• 2025 Contribution Limits:
• Employees may contribute up to $16,500.
• Catch-up contributions for employees aged 50-59 or 64 and older are $3,500; for those aged 60-63, the catch-up contribution is $5,250.
• Employers can either:
• Match employee contributions up to 3% of compensation.
• Contribute a flat 2% of each eligible employee’s compensation.
• Pros:
• Encourages employee participation in retirement savings through salary deferrals.
• Lower contribution limits and mandatory employer contributions are manageable for smaller businesses.
• Straightforward setup and administration.
• Considerations:
• Lower contribution limits compared to SEP IRAs.
• Employer contributions are mandatory annually.
3. Choosing the Right Plan for Your Business
• Consider a SEP IRA if:
• You are self-employed or have a small number of employees.
• You seek higher contribution limits to maximize retirement savings.
• You prefer the flexibility of deciding on contributions annually.
• Consider a SIMPLE IRA if:
• You have employees who wish to contribute to their retirement savings.
• Your business can consistently support mandatory contributions.
• You desire a plan that is easy to administer with shared contribution responsibilities.
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. Tax Advantages of Both Plans
• Employer Contributions: Tax-deductible, reducing taxable business income.
• Employee Contributions (SIMPLE IRA): Made pre-tax, lowering taxable income for employees.
• Tax-Deferred Growth: Investments grow tax-free until distributions are taken in retirement.
Let Simply Balanced Accountants Help You Decide
Selecting the appropriate retirement plan is a significant financial decision that should align with your business’s unique needs. At Simply Balanced Accountants, we specialize in assisting small businesses with retirement planning and tax strategies.
Let’s develop a plan tailored to your business and future goals. Contact us today to get started:
• Website: www.simplybalancedaccountants.com
• Phone: 517-897-2144
• Email: connect@simplybalancedaccountants.com
A secure retirement begins with the right plan—let us help you make the best choice.
