Choosing Between SEP vs SIMPLE IRA for Retirement


The majority of individuals are familiar with traditional IRAs and Roth IRAs, which serve as effective tools for accumulating retirement savings. These two options primarily differ in their tax implications. However, there exist two lesser-known types of individual retirement accounts: the SEP vs SIMPLE IRA. Familiarizing yourself with the unique features and advantages of each of these accounts can be instrumental in determining the most suitable choice for your retirement strategy.

Additionally, if you happen to be a small business owner, understanding these account types can aid in making informed decisions about retirement benefits for your employees. Should you require assistance in crafting a comprehensive financial plan to achieve your retirement objectives, consulting with a qualified financial advisor is a prudent step to take.

What’s a SEP or SIMPLE IRA?

A SIMPLE IRA is short for “Savings Incentive Match Plan for Employees Individual Retirement Account.” It’s like a regular IRA, but you can put more money into it.

Anyone, even if they don’t have a fancy job with a 401(k), can start a SIMPLE IRA. Additionally, between SEP vs SIMPLE IRA for sole proprietor or small businesses, SIMPLE IRA is better. If your employees made at least $5,000 in each of the past two years and expect to make that much this year, they can join the plan.

Meanwhile, SEP is short for Simplified Employee Pension, and it’s for bosses, even if you’re your own boss. The cool thing is, bosses can skip the tricky paperwork that usually comes with retirement plans. Only the boss puts money in it. They can add up to 25 percent of what you make each year, but no more than $66,000 in 2023. Everyone gets the same percentage, but some folks with union retirement plans might not be included.

The good news for you is that all the money in your SEP IRA belongs to you right away, and you get to decide what to do with it. You can let it grow without paying taxes until you retire if you go the traditional route, or you can pick a Roth SEP IRA for tax-free growth.

What’s the difference between SEP IRA and SIMPLE IRA?

SEP IRA and SIMPLE IRA are a bit like 401(k) plans, but they have some important differences. Your employer sets up both of these plans for you, and they work kind of like traditional or Roth IRAs.

Here are the main differences between them:

SEP IRA: Only your boss can put money into this plan. You can’t add your own cash.
SIMPLE IRA: You can put money into this plan from your paycheck. You get to choose how much you want to save.

SIMPLE IRA: Your boss has to add some money to your account, or they might get in trouble with the IRS. They have two options for how much they can add.
SEP IRA: Your employer can put money into this plan if they want to, but they don’t have to.

SEP IRA: Your employer can add up to $66,000 (in 2023) or 25 percent of your salary, whichever is less.
SIMPLE IRA: You can add up to $15,500 (in 2023), and your employer can also add more if they want.

So, with a SEP IRA, it’s mostly your employer contributing, while with a SIMPLE IRA, you can pitch in too.

Pros and Cons of SIMPLE IRA

The Pros:

  • This plan helps you and your workers save for retirement. If you work for yourself, it’s a good way to save money and get tax benefits.
  • You can grow your contributions without paying taxes right away. It’s like putting your money in a special savings account that doesn’t get taxed until you take it out.
  • Your employees can have their savings taken out of their paychecks, just like in regular 401(k) plans.
  • Employers can add money to employees’ accounts in two ways: by matching what employees put in or by giving a set amount based on their salary.
  • When your boss adds money, you own it right away. It’s legally yours as soon as it’s in your account.
  • You can save more money in this plan compared to regular IRAs, but not as much as in a 401(k) or SEP IRA.
  • If you’re 50 or older, you can save an extra $3,500 (in 2023) to catch up on your retirement savings.

The Cons:

  • If you want to create a SIMPLE IRA, your company can’t have more than 100 employees who made over $5,000 in the last year.
  • Employers have to put money into their employees’ accounts every year.
  • If you take money out of a regular SIMPLE IRA before you’re 59 ½ years old, you’ll have to pay extra taxes and a 10 percent penalty. With a Roth SIMPLE IRA, you can take out your contributions anytime without extra charges, but if you withdraw earnings before 59 ½, you’ll face a penalty.
  • With a regular SIMPLE IRA, you must start taking out a certain amount each year once you reach 73. But with a Roth SIMPLE IRA, there are no mandatory withdrawals.

Pros and Cons of SEP IRA

The Pros:

  • This plan helps you save for retirement, especially if you’re your own boss and don’t have many retirement savings options.
  • You can put in money before or after paying taxes. You can either get a tax break now and pay taxes later when you take out the money, or go with the Roth version for tax-free withdrawals.
  • Setting it up is easy. You just fill out one form from the IRS, and a broker who handles SEP IRAs can help you with the rest.
  • When your boss adds money, it’s yours right away. You own it as soon as it lands in your account.
  • You can save more in this plan compared to regular IRAs or a 401(k).
  • You have flexibility. You don’t have to put in money every year, for yourself or your employees.

The Cons:

  • You have to treat your employees the same way you treat yourself in a SEP IRA. You put in the same percentage of their pay as you put in for yourself. They can’t add their own money.
  • Unlike IRAs and 401(k)s, there’s no special option for saving more if you’re 50 or older in a SEP IRA. But the higher contribution limits might make up for that.
  • If you take money out of a regular SEP IRA before you’re 59 ½, you’ll have to pay extra taxes and a 10 percent penalty. With a Roth SEP IRA, you can take out your own contributions anytime without extra charges, but you’ll face a penalty if you take out earnings before 59 ½.
  • With a regular SEP IRA, you have to take out a certain amount each year starting at 73, but a Roth SEP IRA has no such requirement.

SEP vs SIMPLE IRA – Which is the Best Choice for Your Retirement?

Understanding the nuances of SEP vs SIMPLE IRA can make a world of difference in securing your financial future. Whether you’re a self-employed individual looking for flexible saving options or a small business owner considering retirement benefits for your employees, these choices matter. To make informed decisions tailored to your unique circumstances, consult a qualified financial advisor who can guide you through the maze of retirement planning. Your future self will thank you for taking this crucial step towards financial security.


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