In this episode, Jay and Chris discuss the differences between a Simple 401K, Simple IRAs, and SEP IRAs. How can this save you money on taxes and save you money on retirement? Tune in to find out how!

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As an entrepreneur, you might have heard about Simple IRAs, SEP IRAs, and Simple 401Ks – different types of retirement plans for small business owners. However, it’s understandable if the jargon makes your head spin. That’s why in this Accounting For You episode, we’ll break down these retirement plans to help you understand what they mean and which plan is best suited for your business.

Firstly, let’s start with Simple IRAs. A Simple IRA stands for Savings Incentive Match Plan for Employees. It is a retirement plan that allows employees to contribute a percentage of their pre-tax dollars into their retirement accounts. As an employer, you will have to match a certain percentage of your employee’s contributions into their retirement accounts, which can be a great incentive for them to save for their golden years. Simple IRAs are best suited for small businesses with fewer than 100 employees. However, if your business is growing, and you intend to hire more employees, a Simple IRA may not be the best option because of the contribution limits.

Secondly, SEP IRA, which stands for Simplified Employee Pension plan. A Sep IRA allows employers to contribute to their employees’ retirement accounts. Unlike a Simple IRA, the employer contributions are tax-deductible. Although SEP IRAs are best suited for small businesses with few full-time employees, they do not have the same contribution limits as a Simple IRA. With a SEP IRA, you are allowed to contribute up to 25% of each employee’s compensation, up to $290,000 in 2021. However, unlike a Simple IRA, you don’t have to make contributions every year. It’s for solo-entrepreneurs, sole-proprietors, or business owners that want to save more with the contributions limits, regardless of the workforce size.

Thirdly, the Simple 401k, which is a hybrid plan that combines features of a traditional 401k plan and a Simple IRA. A Simple 401k permits both employer and employee contributions, with the potential for matching. It’s ideal for small businesses with 100 or fewer employees who want to encourage savings for retirement via employee contributions. Employees can contribute up to $13,500 in 2021, and individuals over 50 can contribute an additional $3,000, which is higher than the Simple IRA. Employers are obligated to contribute a dollar-for-dollar match of the employee contribution up to 3% of the employee’s compensation or a 2% non-elective contribution. The latter means no contributions coming from the employees, and the employer makes a flat contribution of 2% of their employee’s compensation, whether or not the employee contributes.

In conclusion, choosing the right retirement plan is crucial in providing long-term benefits to both you and your employees. You’ll need to review all the retirement options and their requirements critically. In general, if you work alone and want to save more, a SEP IRA could be good for you. If you’re a small business owner with employees, but the workforce is less than 100, a Simple IRA could be ideal. However, if you’re a small business owner with 100 or fewer employees and want a plan that permits both employee and employer contributions, you should consider the Simple 401k. Remember, you can also contact a financial advisor to help you choose the right retirement plan that meets your business needs.