Two IRAs were created for small-business owners with no company retirement plan. A SEP IRA (Simplified Employee Pension) is a modified profit-sharing plan for firms of 25 or fewer eligible employees. The employer makes contributions for employees based on a percentage of earnings but does not have to put in anything if the firm has a bad year.

A SIMPLE IRA (Savings Incentive Match Plan of Small Employers) is an alterative to a qualified 401(k) plan. The employer matches employee contributions up to 3 percent of salary for at least three out of five years.

David Robinson, president of Resource Consulting Group in Austin, compares the program. “A SEP is more suitable when the employers’s compensation is significantly higher than the employees’, when turnover is relatively high, and there is profit uncertainty,” he says.

“A SIMPLE is more attractive when the employer wants to offer retirement salary deferral without any discrimination rules or administrative hassles to deal with when the business has relatively stable profits to support the mandatary matching contributions, and when the employer does not need the higher contribution limits of the SEP.”

Reprinted from Spirit magazine
November 1999

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)