A retirement plan for a small business can be tricky to find. You would want a plan that has low contribution minimums and affordable administration fees without sacrificing the benefits that your employees may receive. Of all retirement plans available for small business proprietors and self-employed individuals, the SEP IRA and SEP 401k plans are the top choices. What is a SEP IRA and what are the SEP IRA rules? A SEP 401k? What are their similarities and differences? Which is better for my business?
A SEP IRA is a retirement plan that allows the employer an easy method of contribution to the employee’s IRA. When to make contributions and how much will be contributed is all up to the employer. The limits of contribution are generous: $49,000 or 25% of the worker’s annual salary. The contribution to be made will be the lesser of the 2. An advantage of this plan is that it can include a big number of employees under the SEP.
Similar to a SEP IRA, the SEP 401k contributions are also employer discretionary. Contribution limits for this plan are: $15,500 maximum from employee’s salaries plus an additional 25% of the employee’s compensation as employer contributions. The catch is that this plan is only for the account older and his or her spouse, any employee cannot be part of the plan.
Of the two, the SEP 401k can potentially have a bigger contribution allowance. Say for example, an employee is receiving $100,000 a year. In a SEP IRA, maximum contribution possible would be 25% or $25,000. For a SEP 401k, that would be $15,500 taken from the salary, plus an employer contribution of 25% or $25,000. That would amount to a maximum possible contribution of $40,000fot the SEP 401k. The only drawback of the SEP 401k is that employees are not catered in the plan, so if you plan to expand your business and hire more to work from you, then the SEP IRA is the obvious choice.
- SEP IRA: the Flexible Retirement Plan (2010tax.org)
- Retirement Plan for You Small Business? Choose a SEP IRA (2011taxes.org)