As a small business owner, planning for retirement can seem overwhelming, especially when balancing the financial commitment and administrative duties that come with retirement plans. Fortunately, there are options that provide flexibility and ease of setup, such as the Simplified Employee Pension (SEP) and the Savings Incentive Match Plan for Employees (SIMPLE). These plans allow business owners to save for their retirement while offering valuable benefits for employees.
In this blog, we’ll explore the benefits of the SEP and SIMPLE retirement plans, including contribution limits for 2025 and how to set up and manage each plan. Let’s dive into how you can start planning for the future without the headaches of complex administrative tasks.
What is a SEP IRA and How Does It Work?
A Simplified Employee Pension (SEP) is a popular retirement plan option for small business owners. It’s easy to set up and offers flexibility in terms of annual contributions. For instance, you have the discretion to decide whether or not to contribute in a given year, making it an ideal choice for businesses with fluctuating revenue.
Tax Savings and Contribution Deadlines
For business owners who wish to take advantage of 2025 tax savings, you can still establish and contribute to a 2025 SEP IRA up until the extended due date of your tax return. For example, if you’re a sole proprietor who files an extension for your 2025 Form 1040, you have until October 15, 2026 to set up your SEP and make the initial contribution.
This contribution can then be deducted from your 2025 tax return, helping you reduce your taxable income.
Key Benefits of a SEP IRA:
- Easy Setup: Setting up a SEP is simple. Use IRS Form 5305-SEP, which you don’t need to file with the IRS. This form satisfies the requirements for establishing a SEP, although you may opt for a custom-designed SEP if necessary.
- Tax Deductions: As the employer, you can deduct the contributions you make to your employees’ SEP IRAs from your taxable income. Employees don’t pay taxes on these contributions until they withdraw the funds, usually during retirement.
- Contribution Limits for 2025: The maximum contribution to a SEP IRA for 2025 is the lesser of:
- 25% of compensation, or
- $73,000 (up from $69,000 in 2024).
If you’re a sole proprietor or business owner who does not receive a W-2 (such as if you’re an unincorporated sole proprietor), the rules for calculating your own contribution to the SEP differ slightly. However, you still have the opportunity to make substantial tax-deferred contributions to your own retirement.
How Does a SEP IRA Work for Employees?
Employees manage their individual SEP IRAs, controlling their investments and benefiting from tax-deferred earnings. However, employees cannot contribute to their SEP IRAs. As the employer, you make the contributions based on a percentage of their salary. These contributions must be made uniformly for all employees who are eligible to participate.
There are basic eligibility requirements you must meet to establish a SEP. For instance, you must offer the plan to all employees who are at least 21 years old, have worked for the business in three of the last five years, and earned a minimum of $650 in 2025 (adjusted annually for inflation).
Additionally, the contributions made to employees’ SEP IRAs cannot discriminate in favor of highly compensated employees, ensuring that all employees are treated equally in terms of contributions.
Why Choose a SEP IRA?
A SEP IRA is a great option for small businesses because it:
- Has minimal administrative requirements: No annual IRS filings, and recordkeeping is often handled by the trustee of the SEP IRA (typically a bank or mutual fund).
- Is flexible: You decide each year whether to contribute, making it an ideal plan for businesses with varying cash flow.
- Offers high contribution limits, allowing both you and your employees to save significant amounts for retirement.
What is a SIMPLE IRA and How Does It Work?
For businesses with 100 or fewer employees, the SIMPLE IRA plan is another excellent option to consider. Unlike a SEP, the SIMPLE IRA allows both employers and employees to contribute, making it a more robust retirement savings plan for businesses that want to encourage employees to save for retirement.
How Does the SIMPLE IRA Work?
- Employee Contributions: Employees can make salary deferrals into the SIMPLE IRA. For 2025, employee contributions are capped at $16,500, with an additional $3,500 catch-up contribution allowed for employees aged 50 or older.
- Employer Contributions: As the employer, you’re required to make a contribution on behalf of your employees. You can choose between:
- A matching contribution of up to 3% of an employee’s salary, or
- A non-elective contribution of 2% of each eligible employee’s salary, regardless of whether they contribute themselves.
Setting Up a SIMPLE IRA
The SIMPLE IRA is easy to establish and administer, with fewer regulatory requirements than traditional retirement plans. As the employer, you’re required to make contributions, but your administrative burden is still lower compared to more complex retirement plans like 401(k)s.
For business owners with fewer employees, the SIMPLE IRA is a great alternative to consider, especially if you want to involve your employees in retirement savings and match their contributions.
Contribution Limits for 2025
- Employee deferrals for a SIMPLE IRA are $16,500 for 2025 (up from $15,500 in 2024).
- Catch-up contributions for employees aged 50 and older are $3,500.
Employers are required to contribute either a 3% matching contribution or a 2% non-elective contribution, depending on the option chosen.
Another Option: SIMPLE 401(k)
In addition to the SIMPLE IRA, you may also consider a SIMPLE 401(k), which combines the features of a SIMPLE IRA with the structure of a 401(k). The SIMPLE 401(k) is available to employers with 100 or fewer employees and offers:
- Employee salary deferrals (similar to the SIMPLE IRA),
- Employer matching contributions (up to 3% of salary),
- No complex nondiscrimination rules that apply to traditional 401(k) plans.
Which Retirement Plan Is Right for Your Small Business?
Choosing the right retirement plan depends on your business’s size, structure, and financial goals. A SEP IRA is an excellent option for smaller businesses or sole proprietors who want maximum flexibility with minimal administrative effort.
A SIMPLE IRA is better suited for businesses that want to involve their employees in retirement saving and are willing to make matching or non-elective contributions. Both options allow you to save on taxes while securing a stable financial future for yourself and your employees.
Need Help Choosing the Right Retirement Plan? Contact Our Team
If you’re unsure which retirement plan is best for your small business, our team is here to help. We specialize in helping business owners like you navigate the complex world of retirement planning, ensuring you choose the option that aligns with your goals and makes sense for your business.
Contact us today to get started on your retirement plan:
Phone: (878) 778-8646
We’re ready to assist you with setting up the perfect retirement plan for your business and ensuring long-term financial security for you and your employees.