Simple IRA

What is the Difference Between a Simple IRA and a SEP IRA?

Since the establishment of individual retirement accounts (IRAs) there has been developments around the initial plans giving room to improvements of the traditional IRAs. Today, there are more inclusive plans which are beneficial to both employer and employee. Depending on the existing factors of a company or business, they can choose among many types of IRAs that suit them best. Some of the best plans are the SIMPLE IRA and the SEP IRA.

Remember, I’m not intending on giving financial advice here as that’s not my job.  I’m simply sharing my experiences to help fellow Entrepreneurs be informed that they do indeed have options when it comes to controlling their retirement savings.  

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is a plan used by employers who do not have a retirement plan for their employees. One of the benefits of SIMPLE IRA is that both employee and employer contribute to this plan.

The Simplified Employee Pension (SEP) IRA is a special platform where employers contribute to a retirement plan like the traditional IRAs but these ones are more ideal for business owners and self-employed individuals.  The SEP IRA is the plan that I have through Equity Institutional, for full disclosure.  It allows me to buy alternative investments of my choosing, such as stocks, precious metals, cryptocurrency, and even real estate.

SIMPLE IRA and SEP IRA share quite a number of similarities and diverse differences. If one is considering creating a retirement plan for their small size companies, they can compare the benefits of SIMPLE IRA and SEP IRA, and check what suits them best. Below is a comparison of the two plans which highlights most of the areas of interest to a member.

Overall Benefits;

Benefits of SIMPLE IRA and the benefits of SEP IRA are almost similar since they share the same tax status. In both plans, the member benefits from tax deductions in investments which allows them to create growth. When it’s ready for withdrawal, the member is charged the same percentage of tax on the withdrawals as they were paying initially.

Advantages Of a SIMPLE IRA

Tax-deferred savings

Tax-deferred savings

SIMPLE IRA allow employees to defer a certain portion of their salaries into the retirement plan. The money grows tax-deferred until it is withdrawn during retirement. This allows savings to increase faster.

Easy to run

SIMPLE IRA do not require a lot of bureaucracy that comes with the majority of other investment plans. Employers can run SIMPLE IRA smoothly without the need to hire trained staff.

Multiple investment choices

SIMPLE IRA contributions can be invested in individual stocks and mutual funds among other similar types of investments. The investors are able to get many plans that offer growth and income.

Instant Vesting

Matching employer contributions are for the employees and they can take them whenever they leave irrespective of the tenure. Employers are expected to match contributions in qualified retirement plans for instance the 401(k)s. This usually comes with a well graded vesting schedule which requires employees to work for the company for a certain number of years before they can have the authority to own all matching contributions. The law requires all the employers who set up SIMPLE IRAs to match employee contributions.

Tax benefits

Employees who have had their gross income fall below a certain limit could be eligible to take a non-refundable savers credit of about $2000 of the contributions every year. In the SIMPLE IRA plan, the low income earners are offered a tax credit of up to $ 1000 and $2000 if married and filing jointly.

Benefits of a SEP IRA

Simplified employee pension plans

Simplified employee pension plans

SEP IRA, such as the Vanguard SEP IRA, provides employers a simplified way of setting up retirement savings accounts and making contributions for their employees. The employers are expected to have a written SEP plan agreement and provide the requirement details to employees then set up SEP IRA accounts for each of them. There are salary reductions and a simplified employee pension plan that allows employees to contribute to their accounts. Employers are allowed to establish this type of plan and make it easy for their employees to participate in the already existing plans.


Employers can make the SEP IRA available to their employees and can also establish accounts for themselves. Partners in limited liability companies are also allowed to set up SEP IRAs. For this type of a retirement plan, the employees do not have to stress about making any contributions since it is only the employers who are allowed to make contributions.

Cost and simplicity

SEP IRAS are mostly ideal for small businesses but any size business can establish them. Compared to the traditional retirement plans, SEP IRAs have a lower startup and operation cost. Annual filing requirements with the SEP IRA is not a must for the employers thus reducing their work load.

Adjustable employee requirements and contributions

SEP IRAs provides business owners with flexibility to contribute more when their businesses are doing well. Employers are supposed to decide employees are eligible for this type of retirement plan and adhere to standard requirements. The employers are also allowed to set their own restrictive rules when setting up the SEP IRAs.

Long term planning

SEP IRAs provides employees with the opportunity to take part in a wide range of investments. They can also transfer funds to and fro SEP IRA into or from other type of retirement accounts. This means that they can easily consolidate their savings.

Size of Employees

The two plans are very suitable for small businesses, entrepreneurs and self-employed individuals who desire to establish themselves. The plans are very flexible and they allow the contributors to give a varied amount of monthly contributions and random deposits. The two plans also are best for small businesses because they have plans for even a single person to a max of around one hundred employees. The plans are generally easy to administer in the thought that if a business does well in one month, with SEP IRA, the member can deposit huge amounts of money and this is very beneficial since it has high contributions.

Contributions Schedules

With SEP IRA, the employees are not allowed to make any kind of deposit to their accounts but they have entirely full control of the accounts. The employer contributes about twenty five percent of the salary of every employee.

The SIMPLE IRA provides a platform for both employer and employee to contribute to the plan unlike SEP IRA.

Contribution Limits

The SIMPLE IRA has a higher contribution limit and flexibility ratio of payments than both employer and employee. Also it is mandatory to have the contributions from your employer done if one is eligible for SIMPLE IRA, even if one does not choose to give money willingly. The SIMPLE contribution limit currently is $13500 b members can add contributions of $3000 and even better for those above fifty years who have a higher limit of $16500.
SEP IRA, the employer contributes an equal percentage of input to both himself and the employee. With SEP IRA, the amount contributed per member can be increased up to $57000 but the employer is not under pressure to make any contribution whatsoever.

Income requirements

For employees to qualify for SIMPLE IRA, they need to have earned at least $5000 from the employer setting up the plan. The employee also needs to expect to earn at least the aforementioned amount in the calendar year. For the SEP IRA, employees cannot make any contributions. This implies that for them to be eligible, they ought to liaise with their employers to contribute.

Entrepreneurs with startup companies who would like to assist both themselves and their employees save for retirement should consider investing in SIMPLE IRA or SEP IRA investment plans. Depending on your structure, one of them may be the best IRA account for you.  However, they should take time and research more about each retirement plan to have an in-depth understanding of the limitations and gains of the plans. For those who have no idea about how they can successfully plan for their retirement, they should hire a financial advisors who are highly proficient about retirement planning.

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Tim Schmidt


Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started IRA Investing to share his expertise in using his Self-Directed IRA for alternative investments. His views on retirement investing have been highlighted in USA Today, Business Insider, Tech Times, and more. He invested with Goldco.