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Compare SEP, SIMPLE IRA and 401(k) for your business

The following provides a brief comparison of three types of retirement plans: SEPs, SIMPLE IRAs, and 401(k)s. Ultimately, a business owner should consult his or her tax counsel before embarking on a particular retirement plan strategy.


Most appropriate for:

SEP – self-employed with few or no employees.

SIMPLE IRA – business with fewer than 100 employees. No other employer retirement plan in place. Owner wants employees to make own salary deferral contributions.

401(k) – business with more than one employee. Owner wants to encourage employee salary deferral and potentially provide employer contribution.


Key Advantages:

SEP – easy to establish and maintain.

SIMPLE IRA – provides a salary reduction plan with little administration.

401(k) – allows for flexible employer profit sharing plus employee salary deferral.


Funding requirements:

SEP – Employer contributions only. Contributions can vary year to year. Immediate 100% employee vesting.

SIMPLE IRA – Employee salary reduction and/or employer contributions. Immediate 100% employee vesting.

401(k) – Employee salary deferral and/or employer contributions. Employer contributions vest per plan’s schedule.


Employee inclusion:

SEP – must be offered to all employees at least 21 years old, employed 3 of last 5 years, and earned at least $550 in a year.

SIMPLE IRA – Must be offered to all employees who have earned at least $5,000 in previous 2 years.

401(k) – Generally, must be offered to all employees 21 years or older who worked at least 1,000 hours in previous year.


Annual Contribution:

SEP – up to lesser of 25% of compensation (IRS compensation limit of $250,000) or $50,000.

SIMPLE IRA – employee contribution up to $11,500. Employer must match employee contributions $ for $ up to 3% of compensation (can be reduced in certain circumstances) or contribute 2% of each eligible employee’s compensation (IRS compensation limit of $250,000).

401(k) – employee contribution of $17,000. Employer & employee combined contribution limited to the lesser of 100% of compensation or $50,000 (plus catch-up contribution).


Catch-up Contributions:

SEP – none allowed.

SIMPLE IRA – up to $2,500.

401(k) – up to $5,500.



SEP – withdrawals anytime subject to current income tax rates and possible 10% penalty if under age 59 ½.

SIMPLE IRA – withdrawals anytime. If employee is under age 59 ½, may be subject to a 25% penalty during first 2 years of participation and 10% thereafter.

401(k) – withdrawals allowed only upon specified event such as reaching age 59 ½, death or separation from service. Loans and hardship withdrawals may be permitted. Withdrawals prior to age 59 ½ may be subject to 10% penalty and current income tax rates.


Rules and rates are for 2012. Seek the advice of tax counsel before selecting the appropriate retirement plan for your business.


For a more detailed comparison of retirement planning options view Retirement Plan Chart at tridentwa.com.

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Comment   |  7 years, 10 months ago from Point Pleasant Beach, NJ