Small business owners have different retirement options than most: the SEP IRA and SIMPLE IRA. These lesser-known options can provide tax benefits and have higher contribution limits than the traditional IRA.
SEP IRA and Roth SEP IRA
The Simplified Employee Pension (SEP) IRA offers a cost-effective retirement solution for small businesses. As the employer, you fund accounts for yourself and your employees at the same percentage of income. The 2024 annual contribution limits are the lesser of 25% of the employee’s gross salary or $69,000. Notably, there are no catch-up contributions.
Employees may be required to be at least age 21 and have provided service in at least 3 of the last 5 years. Employees cannot contribute themselves. Participating employers may qualify for a tax credit of up to $500 per year for each of the first three years. People with side hustles may also open a SEP and contribute up to 20% of their self-employment income. SEP plans also can be rolled into traditional IRAs.
In 2023, the IRS also introduced the Roth SEP IRA, allowing after-tax contributions and eliminating required minimum distributions (RMDs). The Roth also allows tax and penalty-free withdrawals made before and after age 59½. The RMD age is 72 or 73 if you turn 72 after December 31, 2022.
SIMPLE IRA
Alternatively, the Savings Incentive Match Plan for Employees (SIMPLE) IRA is easy to set up for self-employed individuals or businesses with up to 100 employees. The SIMPLE IRA follows traditional IRA investment, distribution, and rollover rules.
Employees may contribute up to $16,000 in 2024, or $19,500 with catch-up contributions for those aged 50 and older, which may be made by salary deduction. Employers must annually contribute 2% of the employee’s salary or match up to 3%. Employers earn a tax deduction for their contributions and receive a maximum tax credit of $500 per year for opening a SIMPLE IRA with automatic enrollment.
Eligible employees may be required to have earned $5,000 in compensation in each of any two prior years and expect $5,000 this year. Employers may alter those requirements and exclude employees who receive union benefits. SIMPLE IRAs are low-cost to maintain but cannot be rolled into traditional IRAs without going through a two-year waiting period.
Comfortable Small Business Retirement
For details on the SEP, Roth SEP, and SIMPLE IRA, visit the IRS website. For tax information, consult your tax accountant. For a free consultation with experienced financial advisors who work with individuals and small businesses, contact First State at 918-492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.