Like other qualified retirement plans, such as a 401(k) plan, SIMPLE and SEP IRAs give you and your employees a way to reduce current income taxes by making pre-tax contributions into a retirement investment account. Contributions grow tax-deferred until withdrawal.
The SIMPLE IRA allows both employer and employee to contribute up to a total of $12,000 for 2014, which is much more than what can be contributed to a traditional IRA. If you’re age 50 or over, you can also make annual catch-up contributions of up to $2,500.
The SEP IRA must be funded entirely by the employer. SEPs allow for much higher annual contributions of up to $51,000 of 25% of compensation, whichever is less. SEP contributions are flexible. If you have a good year, you can contribute up to the annual limit. If you have a bad year, you can contribute less or choose to not contribute at all.
For your business, both plan types offer several advantages:
- Easy and affordable setup. A single IRS form that you can easily fill out yourself will get your plan up and running. There is no administrator, so you likely won’t have to pay any ongoing administrative fees.
- Simple paperwork. Employers generally have no IRS filing requirements for a SIMPLE IRA or a SEP IRA. You must provide certain notifications of plan rules to all eligible employees, but most or all of these details will be part of the prototype plan document you receive from the bank or financial institution you use to setup the plan.
- Deductible employer contributions. Employer contributions are deductible as a business expense.