IRA-based SEP and SIMPLE plans provide an excellent opportunity to enhance your retirement savings, particularly for small businesses, gig workers, and those with side ventures. Considering various factors is essential in determining the best fit for your situation, so it's advisable to consult with a knowledgeable professional before moving forward. As we near year-end, there are options to consider, not only for 2025 but also for the upcoming year!
Differences in a Nutshell
Both types of plans enable businesses to offer benefits that exceed the standard IRA contribution limits. These increased limits can be well-suited for funding your self-directed IRA. Which plan makes more sense depends on several factors, including your business's organizational structure, the number of employees (if any), and the amount of compensation participants earn.
SEP and SIMPLE plan contributions
The employer makes SEP plan contributions; no employer contributions (deferrals) can be made (with one rare exception for some plans established before 1997). Employers can contribute up to the lesser of 25% of the participant’s eligible compensation or $70,000 (for 2025; the 2024 limit is $69,000). Employers deposit these discretionary contributions into the participants' Traditional IRAs—sometimes referred to as "SEP IRAs"—so that the regular IRA rules apply to the SEP assets.
SIMPLE plans allow participants to defer up to $16,500 (2025) of their income into a SIMPLE IRA. (The 2024 limit is $16,000.) Additional catch-up contributions can be made by certain older workers. Employers must generally make either a 3% matching contribution to those who defer, or a 2% contribution to all eligible employees. Some distribution restrictions apply during the first two years after the initial SIMPLE IRA contribution by the employer.
SEP and SIMPLE plan deadlines
A SEP plan offers valuable flexibility for business owners. You have until your tax filing deadline, including extensions, to establish and fund the plan—allowing you to put one in place even after the tax year has ended. Keep in mind, however, that the IRS requires contributions to a SEP-IRA to be reported on Form 5498 for the year in which the funds are deposited, regardless of the year they are intended for. This unique timing can be a powerful tool in managing both your taxes and retirement savings, making SEP plans an option worth exploring as part of your broader financial strategy.
Example: Eleanor owns a consulting firm with no employees. Her unincorporated business has a tax-filing deadline of April 15, but she has filed for an extension for her 2024 return. Eleanor may set up a SEP plan (and contribute) by October 15, 2025.
SIMPLE plans, on the other hand, are subject to tight establishment deadlines. Because employee deferrals account for the lion's share of contributions, plans for the current year must generally be in place by October 1 to enable participants to defer for at least three months in the plan's first year. (This allows participants to obtain the full matching contribution more readily.) Employers who miss this deadline may establish the plan after October 1, but only for the following calendar year.
SEP and SIMPLE Pros and Cons
No single plan is right for every type of employer. Specific business characteristics and objectives lend themselves to particular kinds of plans.
| SEP Plans | SIMPLE Plans |
| Owner-only businesses—or those that employ only family members | Businesses with employees |
| Owner has a higher income | Owner-only business if the owner has a lower income |
| Owner is willing to make contributions to eligible employees | Owner wants employees to contribute to their own retirement savings |
| Owner prefers a plan with fewer administrative responsibilities | Owner wants to spend less on the plan |
Again, many factors can determine which type of plan works best for a business. An experienced retirement plan professional can help you decide whether to establish a SEP, SIMPLE plan, or a qualified retirement plan, such as a 401(k) plan. Still, a couple of examples may help illustrate some of the advantages of these two plan types.
Example: Sam has a thriving computer-repair business. He established a SEP plan after his first profitable year, and he likes the flexibility of contributing up to 25% of his eligible compensation. He hired his spouse to manage the business, and now his two children also work for him. Sam doesn’t mind making substantial contributions each year through the SEP plan because they are funding his loved ones’ retirement savings.
Example: Ella also has a successful company. She has not, however, hired family members, and finds that a SEP plan would be quite costly if she wants to make her own maximum contribution. For her, a simple plan could work well. She and her eligible employees can decide whether to defer—and how much. This amount is deducted directly from the salaries she already pays. The only additional expense is a relatively modest employer contribution of a 3% match or a 2% profit-sharing-type contribution.
Good Time to Consider Starting a Plan
As we near the October 1 deadline for adopting SIMPLE plans and the October 15 deadline for individuals with tax-filing extensions, we invite you to explore the potential benefits these plans can offer your business. You may be pleasantly surprised by how a workplace retirement plan can enhance long-term savings, even for those with modest earnings from side gigs. While STRATA is unable to provide specific plan recommendations, our knowledgeable self-directed IRA experts are here to guide you through the intricacies of SEP and SIMPLE plans, as well as IRAs in general.
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