What  are SEP and SIMPLE IRAs?

What is a SEP IRA?

A Simplified Employee Pension (SEP) is a written plan that allows small-business owners to make retirement contributions to traditional IRAs (SEP IRAs) set up for themselves and for each eligible employee.

These contributions may be deducted from your business income and excluded from your employees' income. A SEP may not only provide you a tax-advantaged way to save for your own retirement, but may also help you attract and retain qualified employees by providing for their retirements. It may help your business avoid some of the complexities posed by certain other employer-sponsored retirement plans.

Who can establish a SEP?

You can establish a SEP if you are an employer or you have self-employment income. "Employer" includes a sole proprietor, a partnership, a C corporation, an S corporation, a limited liability company, and a limited liability partnership. You do not need employees to set up a SEP, but if you do have them, all eligible employees must be included as SEP participants.

How much can I contribute to a SEP?

You can contribute up to 25% of compensation or $61,000, whichever is less, to an employee's SEP-IRA in 2022. Generally, when calculating the amount you can contribute in 2022, you can consider only the employee's first $305,000 of compensation. If you are self-employed, contributions to your own SEP-IRA are calculated differently. While the above limits also apply to you, your compensation is considered your net earnings from self-employment. Your net earnings from self-employment represent the net income you earned in the business that established the SEP, less the deduction for contributions to your SEP and the deduction allowed to you for one-half of the self-employment tax. A SEP may not only provide you with a tax-advantaged way to save for your own retirement, but may also help you attract and retain qualified employees by providing for their retirements.

What is a SIMPLE IRA?

A Savings Incentive Match Plan for Employees (SIMPLE) IRA makes it easy for small businesses to provide a retirement plan for their employees. These low-maintenance plans are inexpensive and straightforward to set up.

Who can establish a SIMPLE IRA?

SIMPLE IRA plans offer a plan for small employers (with 100 employees or less) that is easy to administer and more cost effective than 401(k) plans. With a SIMPLE plan, employers promise to match employee contributions dollar-for-dollar up to 3% of pay, or to make a "non-elective" contribution for all eligible employees, whether or not they contribute, equal to 2% of pay. It’s important to note that the employer can only contribute a maximum of 3% per employee per year.

How much can your employees contribute?

A SIMPLE IRA plan lets your employees defer up to $14,000 of compensation in 2022 ($17,000 if age 50 or older). SIMPLE plans allow for pre-tax contributions and tax-deferred investing with no discrimination testing and no plan administrative fees.

For more Information on setting up a SEP or SIMPLE plan, contact us at 800.747.5164, option 3.

The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. 

Neither Security Benefit Life Insurance Company nor Security Distributors is a fiduciary and the information provided is not intended to be investment advice. For additional information, including any specific advice or recommendations, please visit with your financial professional.