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Saving for retirement is something many people don’t always think about. They keep putting money into their bank account and don’t think about how much they lose to inflation.
That’s why IRAs are such a good option. They allow employers to encourage investment and offer a perk to attract talent.
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There are many IRAs available. This guide will look at a Simple IRA vs SEP IRA. Here is what you should know.
A Simple IRA is a savings incentive match for employees’ retirement accounts. It’s similar to a traditional IRA. However, it has higher contribution limits and works well for self-employed individuals.
It works like a 401k plan, where employees defer part of their paycheck and send it to their IRA account with pre-tax income. The employer then offers a match to boost the retirement account.
A SEP IRA differs from a Simple IRA through the entity giving the contributions. With a Simple IRA, it’s the employee signing up for the contribution. But with a SEP IRA, the employer contributes to the IRA.
Like other IRA accounts, SEP IRAs come from pre-tax money. The biggest difference is that individuals aren’t allowed to make any extra contributions.
Now that you know about these employee retirement plans, you may be wondering what the main differences are between the two. Let’s take a look at some considerations.
One of the big differences between a Simple and SEP IRA is the contributions allowed yearly. With a Simple IRA, employees can only contribute $15,500 ($3,500 more if you’re over 50) per year to their accounts.
The limits on a SEP IRA are much more generous. Employers can contribute up to $66,000 to an employee’s IRA account. This allows them to build a retirement account much faster if an employer can support a larger contribution.
The withdrawal terms for Simple IRAs and SEP IRAs are similar. They both have a penalty of 10% if you decide to withdraw early before the age of 59 1/2.
However, the Simple IRA has additional stipulations that the SEP IRA doesn’t have. There is an additional 25% penalty for withdrawals within the plan’s first two years unless there is a tax exemption.
In general, both Simple IRAs and SEP IRAs are suitable for sole proprietors. They give people a vehicle to invest earnings pre-tax and save for retirement.
However, since a SEP IRA has a higher contribution limit, it may be advisable to go this route. Make understanding SEP IRA a priority to ensure it’s the right choice for you.
Employee retirement plans are important for a small business to get right. You’re offering them as a perk to convince people to join your company, so you must make the right choice when looking into the simple IRA vs SEP question. But now that you’ve read the guide above, you should have everything you need to know to make the best decision.
If you found this guide useful, head back to the blog. You’ll find more informative financial guides that will help you tackle any situation.
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