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  Tuesday November 21, 2017

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SIMPLE IRA AND SEP PLANS
Learn even more about this topic with the Encyclopedia of Personal Finance™

The savings incentive match plan for employees (SIMPLE) is the latest variation on the IRA to encourage employers and employees to save for retirement. The plan is primarily employee-funded with employer-matching contribution requirements. The employer may match up to 3 percent of employee-deferred compensation. However, it must match up to 1 percent in any 2 of 5 years. Alternatively, the employer may make a flat 2 percent contribution on behalf of all eligible employees (whether they contribute or not) instead of the matching arrangement.

SIMPLE IRAs are limited to companies with fewer than 100 employees. An employee's contribution, in the form of a current salary reduction, is limited to $10,000 in 2005 and will be indexed thereafter. The law also allows taxpayers age 50 and above to make an extra "catch-up" contribution each year--$500 in 2005, going up to $1,000 in 2006 and subsequent years.

The simplified employee pension (SEP) is a variety of IRA designed to help small businesses provide their employees retirement benefits greater than those of the SIMPLE. With a SEP, the employer makes contributions directly to the plan.

There are higher contribution limits in a SEP than in a SIMPLE. Employers may contribute up to 25 percent of earned income or $42,000, whichever is less, on behalf of the eligible employees.

Employee contributions to a newly created SEP are no longer allowed. However, SEPs established before 1997 may allow employee contributions of pre-tax income, up to certain maximums.

Though SIMPLE and SEP plans can be used by the self-employed, there is also another, older plan design specifically for the self-employed. That is the Keogh plan.




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