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Common Questions About SEP and SIMPLE IRAs for Small Business Owners

simple-questions_blogWhile the rules governing SEP and SIMPLE IRAs—two of the most common plans for small business owners—are purposefully straightforward, we often hear a few of the same questions. These answers apply whether you have a self-directed IRA or a traditional retirement plan typically offered by big banks and brokerage houses.

SEP IRA (Simplified Employee Pension)

Q: Who can establish a SEP?

A: Any employer, including self-employed individuals, can establish a SEP.

Q: If I have a SEP, can I also have other retirement plans?

A: You can maintain both a SEP and another plan as long as the other plan is not a SIMPLE plan. Also, unless the other plan is another SEP, you cannot use Form 5305-SEP; you must adopt either a prototype SEP or an individually designed SEP.

Q: Which employees are eligible to participate?

A: Employees over the age of 21 who have worked for the employer three out of the last five years have met the minimum eligibility requirements. To receive a contribution for the year, an employer can also require that the employee has received at least $600 in compensation.

SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account)

Q: Is there a deadline to set up a SIMPLE plan?

A: You can set up a SIMPLE plan effective on any date between January 1 and October 1, provided you didn’t previously maintain a SIMPLE plan. If you’re a new business that came into existence after October 1, you can establish the SIMPLE plan as soon as you are able to after starting business.

Q: Are employer contributions mandatory?

A: Yes. The employer can choose either to match the employee’s contribution dollar for dollar up to 3 percent of the employee’s compensation, or contribute a non-elective contribution based on 2 percent of compensation with no matching.

Q: What kind of assets can I invest in with a self-directed SIMPLE IRA?

A: The same as other self-directed IRAs, you can invest in alternative assets not available with a traditional retirement plan. These include investing in apartments and mortgage notes, gold and certain coins, as well as corporations and private stock and many others. 

These answers were adapted from information on the IRS website. You can explore these tax advantaged plans further with Entrust’s report for small business owners. If you have other questions—from SEP IRA reporting to SIMPLE IRA eligibility—be sure to watch the recording of our webinar, Retirement Plans for Small Business Owners: Live Q&A.

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