Know Your Small Business Retirement Plan Options: What is a SEP IRA?
Understanding different retirement plan options can be tricky, especially when many people are only aware of 401(k) plans. When a 401(k) isn’t the right fit for a business of a smaller size, a SEP IRA, or Simplified Employee Pension IRA, could potentially be the best fit to help you and your employees save for retirement.
Here’s what you need to know when it comes to SEP IRAs:
TARGET DEMOGRAPHIC: Designed for sole proprietorships and very small businesses
EMPLOYER CONTRIBUTIONS: The employer makes all contributions. Employer contributions are capped at the lesser 25% of each employee’s compensation, or $57,000 in 2020 ($56,000 in 2019). Employer must contribute equally to all employees.
SEP IRAs provide flexibility in contributions. If your business has a good year, then you are free to contribute the maximum. In a down year, you can reduce the amount.
Learn more about SEP IRA employer contributions.
EMPLOYEE CONTRIBUTIONS: There are no employee contributions in a SEP IRA. All contributions are made by the employer.
EMPLOYER FILING REQUIREMENTS: There are generally no employer filing requirements with a SEP IRA.
VESTING: Employees are immediately 100% vested in all of the money in their SEP IRA.
SEP IRA PROS: For the self-employed and small businesses, a SEP IRA plan is designed to promote retirement savings without the cost of administration or advisory services that often come with traditional retirement plans like a 401(k). Pros include:
Typically less expensive than a traditional retirement plan
Easy to set up and operate
Less administrative burden than a 401(k)
Flexibility to lower or raise the contribution amount in a given year
SIMPLE IRA CONS:
Employer must contribute equally to all employees
Is a SEP IRA right for your business and employees? Our Retirement Savings Selector Tool for Small Businesses can help you find the retirement plan type that could be the best fit.
The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.