Most people have heard of Roth and Traditional IRAs. But two other types of IRAs are less commonly known: the SIMPLE IRA and the SEP-IRA, which are available to small business owners. They have similarities, but also some key differences.
IT’S SIMPLE
A SIMPLE IRA operates a lot like a traditional IRA, but has higher contribution limits. For 2021, the contribution limit is $13,500, with a catch-up contribution of $3,000 for those 50 and older. And there is no Roth version of a SIMPLE IRA.
Like a 401(k) plan, both the employee and employer can make contributions. The employer must either match a portion of the employee’s contribution or make a contribution equal to 2% of an employee’s compensation.
SIMPLE IRAs are limited to businesses with 100 or fewer employees. So, if your company grows larger than that, you’ll have to transition to a different retirement plan down the road.
PENSION IN NAME ONLY
A SEP-IRA is officially called a simplified employee pension. But it isn’t a pension. Only the employer is able to make contributions, which are limited to the lesser of 25% of an employee’s salary or $58,000 each year. Employers choose how much to contribute and they don’t have to do it each year. But contributions must be proportional for each employee, which can affect how much the business owner can contribute to a personal account.
All employees must be included if they meet specific eligibility rules for age, longevity, and compensation amounts.
If you’re self-employed, utilizing one or both of these plans can help boost your retirement savings beyond that of a traditional or Roth IRA. Work with your financial professional to establish a plan that works best for you.
