WHAT IS A SEP IRA?
The SEP IRA is an individual retirement account for self-employed and small business owners. If you own a small business or have a side job earning passive income, you can qualify for a SEP IRA. You may think that SEP stands for self-employed, but it actually stands for Simplified Employee Pension.
As an alternative to 401k’s, SEP IRA’s give small business owners the ability to contribute money for their employees. A SEP IRA can be ideal for a small business with 10 employees or less. If you have a SEP IRA, you can still open and contribute to a Traditional and Roth IRA. As a self-employed individual, a SEP IRA allows you to put more money in retirement.
Benefits of a SEP IRA
- As of 2023, the contribution limit of 25% of your income up to $66,000 per year is much higher than the Traditional or Roth IRA $6,500 to $7,500 limit.
- For small business owners, SEP IRA’s are low cost alternative to the employer sponsored 401k plan.
- The money you contribute to a SEP IRA is tax deductible for you and your business. This includes money you put away for your employees.
- SEP IRA’s are flexible, allowing you to change your contributions and set your own guidelines for your employee’s qualifications.
- As a small business owner, you can earn tax credits for offering your employees a SEP IRA.
- It helps you and your employees plan for retirement.
If you are a small business owner or earn money with a side hustle like Door Dash, Uber, Lyft, Etsy, or Fiver, consider opening a SEP IRA and minimize the taxes on your earnings with contributions to your SEP IRA. Just remember that you cannot contribute more than 25% of your annual income. If you earn $20,000 in your side job driving for Door Dash, you can only contribute 25% of $20,000, or $5000.
WHAT IS A SIMPLE IRA?
As defined on IRS.gov, “a SIMPLE IRA plan (Savings Incentive Match PLan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.” The 2023 contribution limit for this account is $15,500, which is lower than other employer-sponsored plans like the 401(k).
Information for Employers
While SEP IRA’s are for small business owners with 10 employees or less, a SIMPLE IRA is designed for small businesses with 100 or fewer employees. With SIMPLE IRA’s, the employer is required to make one of two annual contributions:
- Employers are required to make a matching contribution up to 3% of compensation (not limited by the annual compensation limit), OR;
- Employers are required to make a 2% nonelective contribution for each eligible employee
Information for Employees
- Employees may elect to participate in a SIMPLE IRA
- Employees are 100% vested in their SIMPLE IRA, meaning all money in the account belongs to the employee.
- Examples
- If your employer does NOT match contributions, and you do not contribute anything to your SIMPLE IRA, your employer will automatically contribute 2% of your salary annually.
- If your employer offers a 3% contribution match, and you contribute nothing, neither you or your employer will contribute anything to your SIMPLE IRA.
- If your employer offers a 3% contribution match, and you contribute 5% or your income, your employer will contribute 3% in addition to the 5% you contributed. Take advantage of the match if offered.
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