Wednesday, March 9, 2011

Pension plans for the Self-Employed

Q.  My wife and I recently started a small business, and are thinking of setting up a small retirement plan. We have no employees other than the two of us. I'm not certain what the difference is between a SEP IRA and a SIMPLE IRA. Can you please clarify it for me? Thanks for your help. SW, Michigan

A.  Either plan will work fine for your business. Here are the basic differences:

  • A SEP (Simplified Employee Pension) allows an employer to contribute to employees' IRA's without the hassle of setting up a profit-sharing plan. The employee (or self-employed individual) must be 21 years of age, and employed at least 3 or the last 5 years. The contribution is the lesser of 25% of an employees' compensation up to, but not exceeding, $49,000. The employer must contribute to every eligible employee who earns at least $550 in compensation.
  • A SIMPLE IRA  pertains to every employee earning at least $5,000 in the preceding plan year. There are less restrictive eligibility requirements. The employees can make elective deferrals, and for those doing so, the employer makes matching contributions limited to $11,500 ($14,000 for employees age 50 or older), or fixed non-elective contributions equal to two percent of each eligible employee's compensation.
Note:  From the above, you can see a SEP allows you to contribute more to your retirement plan each year. As I am NOT an expert on pension/retirement plans, I only have access to the most basic information. ALWAYS contact a specialist in this area. Most brokerage houses, such as Fidelity Investments which I use, have excellent pension departments and can set these up for you at little or no charge. I call them each year prior to filing our taxes to find out the details I need to know to properly comply with current requirements. You should do the same.

No comments:

Post a Comment