BY: Bill and Cindi Porter, Aileron Investment Advisors
Q: I am self-employed and I am considering using a SIMPLE IRA or a SEP IRA, which would you recommend? – Paul Griffing
A: There are excellent advantages to both a SEP IRA and a SIMPLE IRA but they are very different. Your best choice depends on your circumstances, as well as those of your employees – if you have any.
The biggest attraction of a SEP IRA is that you may put a large amount of money into a retirement plan and receive a tax deduction for the contribution. For 2016, the maximum contribution for a SEP IRA is $53,000 per person if their compensation is high enough. With the SIMPLE IRA, the maximum tax-deductible contribution is $12,500 ($15,500 for employees over age 50). So if the goal is to shelter larger amounts of income from current taxation, a SEP IRA may be the better choice.
However, it is important to note that with the SEP IRA, the employer is making all of the contributions – for all of the employees that may become too expensive for a small business owner if there are many employees. Conversely, with the SIMPLE IRA the employees will also be making part of the contributions.
As a result of the higher contribution limits of the SEP IRA and the shared cost of funding with SIMPLE IRA, a business owner will need to assess which is more important. For example, a couple who owns a small business and has no other employees could put up to $106,000 into a SEP IRA and the entire contribution would be tax-deductible.
If the motivation is to create employee morale and employee retention, a SIMPLE IRA may be the best option. In addition, there are other pension options to SEP and SIMPLE which are available to small business owners. A conversation with your trusted advisor can help you determine what plan is best for you. ✱
All the information in this letter is published in good faith and for general information purposes only. We do not make any warranties about the completeness, reliability and accuracy of this information. Any action you take upon the information is strictly at your own risk.
If the goal is to shelter larger amounts of income from current taxation, a SEP IRA may be the better choice.
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