SEP IRA vs SIMPLE IRA

For a business owner, he or she often hears of SEP IRA or SIMPLE IRA, rather than traditional IRA or Roth IRA. SEP IRA and SIMPLE IRA plans are special retirement plans for business owners. There are many differences between SEP IRA vs SIMPLE IRA, however. SEP IRA vs SIMPLE IRA are totally different retirement plans and should not even be mentioned in the same sentence. SEP IRA stands for Simplified Employee Pension.

What are the differences between SEP IRA vs SIMPLE IRA?

SEP IRA is similar to the traditional IRA. SEP IRA is a retirement plan for a business owner or a self employed individual whereas a SIMPLE IRA is intended for the benefits of the employees and is set up by the employer, similar to how a 401k works.

Who sets up SEP IRA vs who set up SIMPLE IRA?

While the SEP IRA plan is set up by the business owner himself or herself for his or her own benefit, the SIMPLE IRA plan is set up by an employer for the benefits of employees who are qualified under the SIMPLE IRA plan rules.

Deduction limit for SEP IRA vs SIMPLE IRA

Among the most important difference between a SEP IRA and a SIMPLE IRA is the maximum deduction limit for contributions to SEP IRA vs contributions to SIMPLE IRA. While contributions to SIMPLE IRA plans are maxed out at $10,500, the contribution limit for SEP IRA is at:

• 25% of an eligible employee's compensation, or

   

• $45,000 for 2007

Compensation limit for 2007 for SEP IRA or the maximum amount of an employee's compensation you can consider when figuring SEP contributions (including elective deferrals) and the deduction for contributions is $225,000, same as SIMPLE IRA.