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So you’re looking to contribute some money towards your retirement as an entrepreneur and you’re wondering about the SEP IRA vs SIMPLE IRA?

In this video, I’ll show you the 3 key criteria you need to be thinking about when choosing between the SIMPLE IRA vs SEP IRA for a small business retirement plan.

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SEP IRA vs SIMPLE IRA 2023: What You MUST Know

When it comes to planning for retirement, choosing the right Individual retirement account (IRA) can have a tremendous impact on your financial future. For businesses and self-employed individuals, two popular retirement savings options are SEP IRA and SIMPLE IRA. Understanding the differences and advantages of these plans is crucial in making informed decisions for your retirement savings in 2023 and beyond.

SEP IRAs, which stands for Simplified Employee Pension Individual retirement account, and SIMPLE IRAs, short for Savings Incentive Match Plan for Employees Individual retirement account, may sound similar, but they have distinct features that set them apart.

First and foremost, let’s highlight the basic differences between the two. A SEP IRA is typically suitable for self-employed individuals and small businesses with no employees. Contributions to a SEP IRA are made solely by the employer, who can contribute up to 25% of an employee’s compensation or a maximum of $61,000 for 2022 ($62,000 for 2023). The annual contribution limit is extremely attractive for those looking to maximize their retirement savings.

On the other hand, a SIMPLE IRA is designed for businesses with up to 100 employees. It requires both employee and employer contributions, making it a great choice for employers who want to encourage their employees to save for retirement. With a SIMPLE IRA, employees can contribute up to $13,500 in 2022 ($14,000 for 2023), and employers must make either a matching contribution of up to 3% of the employee’s compensation or a non-elective contribution of 2% of the employee’s compensation regardless of whether the employee contributes.

The contribution limits of both SEP IRA and SIMPLE IRA are subject to change annually, so it’s essential to stay updated on the current numbers. However, it’s worth mentioning that the contribution limits for both plans have seen consistent increases over the years, providing individuals and businesses with ample opportunities to save significantly for retirement.

Another critical point to consider is the administrative requirements for each plan. SEP IRAs generally have no annual reporting requirements, making them relatively low-maintenance. However, employers must contribute the same percentage for all eligible employees, including themselves, once the plan is established.

On the other hand, SIMPLE IRAs have slightly more administrative responsibilities. Employers should file Form 5500-SF for IRS informational purposes if the total plan assets exceed $250,000. Additionally, businesses offering a SIMPLE IRA must provide employees with an annual notice about the plan and offer them the opportunity to make salary deferrals.

Choosing between SEP IRA and SIMPLE IRA ultimately depends on your specific needs and circumstances. If you’re self-employed or have a small business with no employees, a SEP IRA might be the better choice due to its high contribution limits and minimal administrative requirements. On the other hand, if you have employees and want to promote retirement savings across your workforce, a SIMPLE IRA is a great option that combines employee and employer contributions.

As with any financial decision, it’s crucial to consult with a qualified financial advisor or tax professional to assess your individual retirement needs and determine the best plan for your situation. They can guide you through the intricate details of each plan, taking into consideration factors such as your income, the size of your business, and your retirement goals.

In conclusion, both SEP IRA and SIMPLE IRA offer attractive retirement saving options, with distinct characteristics tailored to different situations. Whether you’re self-employed, a small business owner, or have a workforce to consider, understanding the differences between these two plans will empower you to make informed decisions about your 2023 retirement savings.