SEP and SIMPLE IRAs, explained
Last week, we talked about Roth IRA contributions. This week, we’re discussing IRAs designed specifically for small business owners.
Note: 401(k)s and other employer-sponsored retirement plans are outside the scope of this discussion —they’re a different beast altogether.
There are two special types of IRAs for small business owners: the SEP-IRA and the SIMPLE-IRA.
We won’t cover all the differences, but here are a few key ones:
- The SEP is funded only by the employer, while the SIMPLE may require employee contributions.
- The SEP has higher contribution limits than the SIMPLE.
- The SEP is super easy to set up and administer; the SIMPLE is somewhat more complicated.
- The SEP can be set up any time, but the SIMPLE must be started by October 5 of the prior year.
The good news—what they have in common
- The biggest difference between Traditional and Roth IRAs is not how the account works – it’s Contributions are 100% deductible. (Period. End of discussion.)
- The contribution deadline can be extended until your tax return is filed. (Unlike Traditional IRAs, which must be funded by April 15, with NO EXTENSIONS.)
- They can be used with any type of business – sole proprietorships, LLCs, partnerships, and corporations.
A few things to be cautious about
- If you have employees, you must share the benefit with them. You cannot contribute only to your own account.
- The maximum contribution calculation can be tricky.
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