A SIMPLE IRA is a tax-deferred retirement plan designed specifically for small businesses with 100 or fewer employees who are earning at least $5,000 a year. It allows you and your employees to make pre-tax contributions as a way to save for retirement. You must make employer contributions on behalf of your employees and employees can also contribute to their own accounts.
A Simplified Employee Pension, or SEP IRA, is a tax-deferred retirement plan available to small businesses of any size. A SEP is funded entirely by the employer – no employee contributions are allowed. Annual pre-tax contributions can vary depending on business cash flow.
An up-front tax deduction for you and your employees helps to reduce current income taxes. The plans are easy to setup and maintain, and employer contributions you make are deductible as a business expense.
There are pros and cons for every type of retirement plan. A SIMPLE IRA can only be used by a company with 100 or fewer employees, so you would have to switch plans if your business grew beyond that payroll number. A SEP requires all employees and business owners to receive the same contribution percentage and the plan is totally funded by the employer.
