SEP vs. SIMPLE IRA: Which is right for your business?

Offering competitive retirement benefits to your employees not only makes them feel valued and appreciated, it's also essential for retaining or attracting the best talent to your team. And as a business owner, it's also up to you to make your own retirement savings a priority.

Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) individual retirement accounts (IRAs) are two of the most popular and convenient ways for a business owner to contribute to both their own and employees' retirement savings. But how do you choose between a SEP vs. SIMPLE IRA? Here's information that can help you make the right choice for your business and employees.

SEP IRAs are a retirement savings vehicle available for business owners, either with or without employees. They also provide the most flexibility when it comes to contributions. Each year, you can decide how much, if any, you contribute to your employees' accounts. This is particularly beneficial if you're in a volatile industry or value the ability to wait until the end of the year.

Only you as the employer can contribute to the plan. Employees can't contribute from their own salaries. Although you have significant flexibility about how much you can contribute, whatever you decide to contribute to employees' accounts in a given year must be the same percentage for each employee—including yourself.

You can contribute up to 25% of each employee's salary, but the total dollar amount can't exceed $66,000 in 2023 or $69,000 in 2024. Although most retirement accounts allow for additional catch-up contributions once a person turns 50, these aren't allowed in SEP IRA plans. Contributions grow grow tax-deferred, which means the tax liability will not occur until withdrawals start in retirement.

Any contributions you make to employee accounts are tax-deductible business expenses.

From an administrative standpoint, SEP IRAs are relatively easy to establish and operate. Unlike more traditional plans, like a 401(k), you don't have to file a return or paperwork for a SEP IRA. This keeps administration costs low.

Read more about SEP IRA features and set-up instructions: How SEP IRAs work: What business owners need to know.

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Any small business with a maximum of 100 employees can establish a SIMPLE IRA, as long as the business doesn't offer any other retirement plan. You make certain matching or non-elective contributions directly to each eligible employee's SIMPLE IRA, including your own. One major difference between SEP and SIMPLE plans is that employees also can make contributions.

For 2023, the contribution limit is $15,500 for people under age 50, or $19,000 for people 50 or older. For 2024, the contribution limit is $16,000 for people under 50, or $19,500 for people 50 or older.

You must contribute to your employees' plans in one of two ways:

• Make a matching contribution of up to 3% of the employee's wages. Note that the 3% match can be reduced anywhere down to 1% in two years out of a five-year period.

• Make a nonelective contribution equal to 2% of wages (up to the annual wage limit of $330,000 for 2023 or $345,000 for 2024) for all eligible employees. This applies to both employees who are and are not deferring their salary to the SIMPLE IRA.

Like a SEP IRAs, SIMPLE IRAs can be simple to establish and operate, and can set up in a few simple steps. Learn more about the set up process of SIMPLE IRAs: How a SIMPLE IRA works.

The SEP & SIMPLE IRAs have many similarities, but there are differences to consider as well. You can't maintain both plans at the same time as a business owner. You also can't offer them both to your employees, although your employees may participate in both plans if you provide one type and another employer has provided them with the other.

The key differences between these plans are outlined at-a-glance:

Establishing a SEP or a SIMPLE IRA for your business may allow you to claim the Retirement Plan Startup Costs Tax Credit. This credit is designed to help offset startup costs for small businesses that set up retirement plans for their employees, and it's worth up to $5,000 per year for three years.

Both of these plans can be good options for your small business. The choice depends on what you want to provide to your employees and what you value most.

• You are a business owner with no or few employees
• You want the ability to take advantage of higher contribution limits for yourself and each employee.
• You are looking for a plan that's easy to administer.

• You have 100 employees or fewer.
• You want to provide employees with the option of saving from their own salaries.
• You're comfortable with a mandatory employer contribution.
• You're looking for a plan that's easy to administer.

Choosing the best retirement plan for you and your small business is a big decision. Speak to a financial advisor to get help finding the right choice for you.