SEP IRA, SIMPLE IRA and Keogh Retirement Plans

Mar 15, 2010Updated 8 months ago

Best Small Business Retirement Plans
The SEP, SIMPLE and Keogh all have the same basic tax advantage in a retirement plan. The employer can deduct a limited amount of contributions made on the behalf of the employee, as well as certain expenses related to the each plan. Each plan also allows employees a limited tax deferment for their contributions. This article looks at the difference between a SEP, Simple and Keogh Retirement Plan.

SEP IRA – Simplified Employee Pension

A SEP IRA or Simplified Employee Pension is a formal written retirement plan that is less complex than other types of plans. With a SEP IRA, the employee controls the plan and the employer makes predetermined contributions. The employee and employer contributions are normally made to a bank, insurance company or other financial institutions that maintain IRA plans. Employers can institute a SEP Plan even if they have another retirement plan.

Eligible Employees

  • 21 years or older
  • worked a minimum of 3 out of 5 years
  • received a minimum of $500 in compensation

SIMPLE IRA and 401K Plan

A SIMPLE IRA Plan stands for Savings Incentive Match Plan for Employees. A SIMPLE Plan can be less complex and less expensive than most plans. This plan is designed for a small business with fewer than 100 employees. If the employer has another retirement plan, the SIMPLE plan cannot be used.

The employer can match the amount that employees contribute using a maximum percentage or use a fixed percentage of the employee’s compensation. The company can also elect to contribute a specific percentage of an employee’s compensation, even if the employee does not elect to contribute on their own.

SIMPLE IRA Employee Eligibility

If an employee received a minimum of $5,000 in earnings before the calendar year and is expected that the employee will receive at least $5,000 in the current year, they are considered eligible for a SIMPLE IRA. Plan. Employees that have a separate union contract that includes a collective bargaining agreement for retirement benefits can be excluded from the company’s plan.

Keogh - H.R.10 - 401K Qualified Plans

Qualified Plans that are created for the self-employed are generally referred to as Keogh or H.R.10 Plans. Like a traditional 401K, a Keogh Plan has similar tax advantages where contributions and revenue generated from investments can be tax deferred. There are basically two types of plans, a defined contribution plan and a defined benefit plan. There are many rules and limitations for Qualified Plans. For further information, please refer to IRS Publication 560.

Whichever IRA plan is adopted, consultation of a qualified financial institution is advisable. Most financial institutions that specialize in retirement planning will administer the plan for the company. In most cases the administration expense of a 401K plan is tax deductible.