SEP IRA vs SIMPLE IRA: How to Choose the Right Plan 2018

Business owners comparing a SEP IRA vs SIMPLE IRA will find that each has unique benefits and works better in certain circumstances. SEPs have higher contribution limits ($56,000) but require employers to fund all employee contributions. SIMPLE IRAs allow employee deferrals up to $13,000 and require employers to match 1% – 3% of compensation.

401(k) plans are so common because they give employers the ability to offer a plan that allows for contributions of $56k but more flexibility in matching programs for employees. For a low-cost, full-featured, 401(k) plan, consider Spark 401k. The one-time setup fee is $750 and administration costs start at just $100 per month. Get started at Spark 401k.

Visit Spark 401k

When to Use a SEP IRA

A SEP IRA is best for self-employed individuals and small business owners who want to contribute more than $26,000 annually and have few employees. SEPs have high contribution limits, at $56,000 annually, and virtually zero administrative costs, but require employers to fund all employee contributions and their own. This makes them uneconomical for businesses with more than three to five employees.

When to Use a SIMPLE IRA

SIMPLE IRAs are better for employers with more than three to five employees because they have the same low administrative costs as SEPs but don’t require employers to fund all employee contributions. Instead, employers are required to match employee deferrals between 1% and 3%, which costs less as employee headcount grows past five+ employees. However, SIMPLE IRAs have lower contribution limits and aren’t good options if you want to contribute over $26,000 per year.

When to Use an Alternative

When it comes to SEP IRA vs SIMPLE IRA, sometimes neither is appropriate, and an alternative may be better. If you expect to have more than three to five employees or your business is cyclical and you need the ability to adjust your match, we recommend a 401(k) as a good option. 401(k)s have higher administrative costs, high contribution limits equal to SEPs, and no requirement to fund employee contributions. Even if you have no employees, you can start with a Solo 401(k) and scale if you hire.

Spark 401k offers small businesses traditional 401(k) plans, safe harbor plans, and solo 401(k) plans that are affordable and easy to set up. Not only that, but they cost up to 66% less than the industry average. Get started with Spark 401k and a 401(k) advisor will help you select the right plan for you and your business.

Visit Spark 401k

SEP IRA vs SIMPLE IRA at a Glance

	SEP IRA	SIMPLE IRA
Investment Options	Mutual Funds, ETFs, Stocks, Bonds, Real Estate	Mutual Funds, ETFs, Stocks, Bonds
Contribution Limits	$56,000 or 25% of income (profit-sharing from employers)	$26,000 (employee deferrals plus employer matching)
Mandatory Matching	0% - All contributions are employer-funded	3%
Pricing	Custodian Fees: $25-$2000, based on headcount Mutual Fund Expense Ratios: 0.035% - 1.5% Trading Costs: starting at $5 for US stocks and ETFs Payroll Provider: Varies by employee headcount and number of pay periods	Custodian Fees: $10-$20 per participant Mutual Fund Expense Ratios: 0.035% - 1.5% Trading Costs: starting at $5 for US stocks and ETFs Payroll Provider: Varies by employee headcount and number of pay periods
Rules & Deadlines	Employers fund all contributions Contributions must be proportional based on annual compensation Contributions or creation anytime before employer tax filing deadline (with extensions)	Must be formed before October 1 Employers must match employee deferrals dollar-for-dollar up to 1% - 3% Matching contributions within 30 days of employee deferrals
Ease of Use	Easily self-administered	Better with a payroll provider like Gusto
Customer Service	Provided by custodian/broker	Provided by custodian/broker or payroll provider, depending on issue
Top Providers	Vanguard, TD Ameritrade, Entrust Group	Scottrade, Schwab, Vanguard
More Information	Visit SEP IRA	Visit SIMPLE IRA

How We Determined When to Use a SEP IRA vs SIMPLE IRA

To compare a SEP IRA vs SIMPLE IRA, we looked at their respective investment options, contribution limits, mandatory matching, pricing, ease of use, and customer service. After a brief review, it’s clear that in many cases, one option or the other will represent a clear advantage, depending on your situation. We also carefully considered employer contribution obligations under each type of plan.

SEP IRAs are best for business owners with fewer than three to five employees. With any more employees, the cost to employers of matching employee deferrals as required under a SIMPLE IRA is more cost-effective than a SEP IRA.

Most business owners who utilize a SEP contribute more than 3% of their own annual compensation to their accounts—as much as 25% or $56,000, whichever is less. Contributions this high are prohibited under a SIMPLE (maximum contributions of $26,000), but can also prove extremely expensive for employers with more than three to five employees.

“SIMPLE IRAs, SEPs and 401(k)s are just a few of the choices small business owners can explore to empower their workers and foster retirement savings. Each offers differing levels of flexibility, maximum employee contribution limits and employer involvement. Which vehicle is best for your company will depend on a wide range of factors. The Department of Labor provides a Small Business Retirement Savings Advisor resource to help.” —Gerri Walsh, Senior Vice President of Investor Education, Finra

If you’re self-employed and aren’t sure that either an IRA or a 401(k) is right for you, another lesser-known alternative that you might consider is a Keogh Plan. Keogh Plans used to be a very common alternative to SEP IRAs but aren’t used very much anymore since there have been changes in tax law. Visit our ultimate guide to Keogh Plans to learn more.

SEP IRA vs SIMPLE IRA: Pricing & Benefits

IRA retirement accounts are known to have low administration costs and solid benefits for single-member companies or various small businesses. However, one plan over the other will typically have cost, matching, and other benefits that work best for your specific needs. Let’s take a look at the pricing and benefits of each.

SEP IRA Pricing & Benefits

SEP IRAs are the clear winner for independent contractors in SIMPLE IRA vs SEP IRA, self-employed individuals, single-member LLCs, or company owners who have few or no full-time employees. This is because the cost is comparable to a SIMPLE, but the contribution limits are more than double. However, due to contribution rules, a SIMPLE IRA might be better if you have more than five employees.

Some of the benefits of a SEP IRA include:

Investment Options

The investment options in a SEP IRA are very wide. Even more options are available through self-directed accounts with alternative providers. For example, you can use a self-directed SEP IRA to invest in things like real estate.

Typical SEP IRA investment options vary by provider but include:

• Stocks: Available through online brokerage firms starting at $5/trade
• Bonds: Can be traded through online brokers for $1 per bond
• Mutual Funds: No-load funds are available through most providers, which charge only expense ratios ranging from 0.035% – 1.5%
• ETFs: Available through online brokers starting at $5/trade; ETFs also charge their own expense ratios, which start at less than 0.05%

Contribution Limits

With respect to contribution limits with SIMPLE IRA vs SEP IRA, SEP IRA contribution limits are much higher than those for a SIMPLE. With a SEP, each year you can contribute the lesser of 25% of your pre-tax income or $56,000 (or $62,000 with catch-up contributions). Contributions have no minimum and can be made any time before your tax filing deadline (with extensions), so you don’t need to contribute for 2019 until October of 2020.

SEP IRA contributions include:

• Profit-sharing: SEP IRA contributions are comprised totally of discretionary employer profit-sharing contributions
• No employee deferrals: Employees are not allowed to contribute to SEP IRA accounts
• No matching: There is no mechanism for employer matching in SEP IRAs

For more information on SEP IRA contribution limits or to calculate your individual limits, be sure to visit our free SEP IRA Calculator.

Mandatory Matching

SEP IRAs do not have employer matching the way people know about with 401(k)s or even SIMPLE IRAs. Employee contributions are not allowed under a SEP. With a SEP, employers are responsible for funding contributions not only for themselves, but also for all employees, and all contributions must be proportional based on annual compensation.

Pricing

SEP IRA costs are extremely low relative to contribution limits. However, SEP IRAs get expensive very quickly with more than one to two employees, because any contributions to your own account must be matched with proportional contributions for all employees (based on annual compensation).

Aside from the cost of employer contributions and the investments we mention above, the primary SEP expenses typically include:

• Custodian Fees: Starting at $20 per participant account and ranging up to $2,000 per year for self-directed accounts to invest in real estate or precious metals
• Mutual Fund Expense Ratios: Start as low as 0.035% and can exceed 1.5% per year
• Trading Commissions: Start at $5 for US stock and ETF trades
• Payroll Processing: Varies by provider according to the number of employees and pay periods per year

The costs of a SEP IRA can be higher if you choose to set up a self-directed account to invest in things like real estate through an alternative provider. However, these costs are not necessary for a SEP, and can vary widely based on what you want to invest in.

SIMPLE IRA Pricing & Benefits

SIMPLE IRAs are often called the poor man’s 401(k) because they mimic the structure but have lower contribution limits and lack the administrative cost. SIMPLE IRAs have some similarities to SEPs and other IRA accounts, but also some key differences. For example, you can only contribute up to $26,000 per year. However, you’re only required to match employee deferrals between 1% and 3%, whereas a SEP requires you fund all employee contributions in addition to your own.

Some SIMPLE IRA benefits include:

Investment Options

SIMPLE IRAs also offer access to many investments, depending on your provider. Like SEPs, SIMPLE IRAs can be self-directed if you want to invest in real estate and other assets. However, this is less common because lower contribution limits make it harder to build large balances in a SIMPLE.

Typical SIMPLE IRA investments include:

• Stocks: Available for as little as $5/trade through online brokerage firms
• Bonds: Traded for $1 per bond
• Mutual Funds: Expense ratios ranging from 0.035% to 1.5%
• ETFs: Can be traded through many providers for as little as $5/trade; ETFs also have their own expense ratios, which start at less than 0.05%

Contribution Limits

SIMPLE IRA contribution limits are much lower than a SEP’s. You can contribute more than 25% of your income to a SIMPLE, but are limited to $13,000. SIMPLE IRA contributions are a combination of:

• Employee salary deferrals: Annual employee contributions can be up to $13,000
• Employer matching: Under a SIMPLE, employers must match employer deferrals dollar-for-dollar from 1% to 3% or $13,000

To maximize your SIMPLE IRA contributions, you may need to match more than the 3% required (unless 3% of your income equals the $13,000 allowed for employee deferrals). Nationwide, more than $64 billion are held in SIMPLE IRAs.

Mandatory Matching

Employers using a SIMPLE IRA have two options. Employers can choose between:

• Non-elective Contributions: Contribute 2% of every employee’s compensation to their SIMPLE account, regardless of whether they participate
• Elective Contributions: Match employee deferrals dollar-for-dollar, up to 1% to 3%

There are some circumstances under which you can lower the match, but only temporarily and not below 1%. Use our Free SIMPLE IRA Calculator to determine how much you may be required to match in employee contributions each year.

Pricing

SIMPLE IRA costs are very similar to those of a SEP. Though SIMPLEs can be self-administered, employers are more likely to use a payroll provider like Gusto to help. These providers are extremely beneficial, but also have their own fees.

In addition to the investment fees we mention above, typical SEP IRA costs include:

• Custodian Fees: Start at $20 to $50 annually per participant account
• Mutual Fund Expense Ratios: Start at 0.035% to 1.5% per year, depending on the fund
• Trading Commissions: US stock and ETF trades start at $5
• Payroll Processing: Varies by provider according to the number of employees and pay periods per year

SEP IRA vs SIMPLE IRA: Rules and Deadlines

In addition to different contribution limits and structures, SIMPLE and SEP IRAs have very different rules and deadlines that you need to consider when choosing a plan.

SEP IRA Rules and Deadlines

SEP IRAs can be established anytime prior to the employer’s tax filing deadline, including any extensions. SEP IRA contributions have the same deadline and can be made in a single payment or over the course of a year. However, SEP IRA contributions must be proportional for all employees and company owners based on annual compensation, and once SEP IRAs contributions are made, they must be vested immediately.

SIMPLE IRA Rules and Deadlines

SIMPLE IRAs must be formed before October 1 of the year they take effect. Employer matching contributions must be made within 30 days of employee salary deferrals. SIMPLE IRAs can be self-administered or administered through a payroll provider, if you choose to use one. You’ll also be required to match all employee deferrals between 1% and 3%.

SEP IRA vs SIMPLE IRA: Ease of Use

The ease of use for a SIMPLE IRA vs SEP IRA is one area of significant difference between the two account types. Whereas a SEP IRA offers small business owners almost unlimited flexibility, they pay a price for that flexibility by funding employee contributions. SIMPLE IRAs, on the other hand, are much less flexible, but potentially less costly.

SEP IRA Ease of Use

SEPs can be established any time before your tax filing deadline (including extensions). You aren’t required to contribute, but can do so throughout the year or all at once—even after year end—as long as it’s before your tax deadline. SEPs are easily self-administered, and you can pick from many providers and invest in almost anything, though sometimes with added cost.

As a business owner, if you have issues with SEP administration or trade execution, it’s very easy to resolve these issues with your provider or, if necessary, change providers. For more information on the ease of use and the simplicity of set up, check out our article on how to set up a SEP IRA.

SIMPLE IRA Ease of Use

SIMPLE IRAs must be set up between January 1 and October 1 of the year the plan will become effective. The employer contribution plan (matching or 2% contribution regardless of participation) must be selected up front. Matching contributions must be deposited within 30 days of the end of the month the deferral was made.

While SIMPLE IRAs can be self-administered, it’s more common for deferrals and matching contributions in these plans to be coordinated through a payroll services provider. Administration and plan management issues can typically be handled through your payroll provider or account provider, but you can always change one or both providers if necessary.

For more information on the ease of use (including how to start one), you can read our article on how to set up a SIMPLE IRA.

SEP IRA vs SIMPLE IRA: Customer Service

Customer service is generally pretty straightforward for both SEP IRAs and SIMPLE IRAs. The biggest difference is usually in the types of providers used, which can vary according to account type.

SEP IRA Customer Service

Most SEP IRA customer service is handled by the mutual fund company or brokerage firm that’s holding the account. If an alternative provider is used for a self-directed account, which is more common with SEP IRAs, there may be customer service issues with the custodian related to any alternative investments.

SIMPLE IRA Customer Service

Like SEPs, most SIMPLE IRA customer service comes from the mutual fund company or broker handling the account. Self-directed SIMPLE IRAs are rarer, and can involve customer service from the alternative provider. Also, many employers with SIMPLEs use payroll software like Gusto to help with administration, which may require separate customer service to answer payroll questions.

SEP IRA vs SIMPLE IRA: Top Providers

Employers can use many of the same providers for SIMPLE IRAs vs SEP IRAs. Some of the best providers are provided below.

SEP IRA Top Providers

Some of the top SEP IRA providers include:

Vanguard

With more than $4 trillion in assets, Vanguard is the largest mutual fund company in the world. It makes SEP IRAs easy to establish and cost-effective to administer, though investments are restricted to mutual funds.

Vanguard is a great provider for employers looking for simple and straightforward SEP IRAs that are cost-effective for employees.

TD Ameritrade

TD is an online broker that offers a high degree of investment flexibility. Investors can invest cheaply in almost any listed stock or bond, as well as ETFs and other instruments. Setup and administration are still easy and very low cost.

TD Ameritrade is a great option for business owners who want to trade individual stocks, bonds, and ETFs in their account.

The Entrust Group

Entrust is a good alternative if you want to invest in alternative assets like real estate or precious metals in your SEP IRA. Providers like Entrust are far more expensive than those who offer only mutual funds or other mainstream investments. While Entrust has no setup costs, annual administrative fees (which exclude a host of other costs) range from $200 to $2,000.

For more information on SEP IRA providers, you can read our article on the best SEP IRA providers for 2018.

SIMPLE IRA Top Providers

Some of the top SIMPLE IRA providers include:

Scottrade

Scottrade is an online discount broker that has branch offices around the country. The company’s expansion into other financial services has left them capable of providing SIMPLE IRA and other retirement services to employers.

We don’t recommend day trading in retirement accounts, but Scottrade offers a great platform for investors who want to trade listed securities in their SIMPLE IRA.

Charles Schwab

Charles Schwab is one of the most well-established financial firms in the United States. They provide a wide array of solutions, including brokerage and investment advisory services. Schwab also provides full banking, employer benefits including SIMPLE IRAs.

If you need additional services separate from retirement planning, Schwab may be a good one-stop-shop for you and your business.

Vanguard

Vanguard has established itself as one of the best providers of small business retirement plans. Investments are generally restricted to Vanguard’s funds, but the firm offers very competitive fee arrangements.

If you want to set up a simple, straightforward, cost-effective SIMPLE IRA with more than 100 well-diversified investment options, you should definitely look at Vanguard.

Bottom Line

SEP IRAs and SIMPLE IRAs both have benefits. They have similar investment options, pricing, and customer service. SEPs are better for the self-employed and business owners who have less than three to five employees. SIMPLE IRAs are better if you have more than three to five employees or wouldn’t likely contribute more than $26,000 annually.

If you’re not convinced that a SEP or SIMPLE IRA is the right small business retirement plan for you, be sure to check out a 401(k) plan. Spark 401k offers small businesses traditional 401(k) plans, safe harbor plans, and solo 401(k) plans that are affordable and easy to set up. Not only that, but they cost up to 66% less than the industry average. Get started with Spark 401k and a 401(k) advisor will help you select the right plan for you and your business.

Visit Spark 401k