SEP or SIMPLE IRA for DIY Investors

Wondering if you should establish a SEP IRA Or A Simple IRA Plan For your Small Business? You may be searching for retirement plan options that you and your employees, without incurring burdensome costs or administrative complexity. SEP and SIMPLE IRAs can be great alternatives to 401(k)s.

SEP or SIMPLE IRA plans each offer attributes that can be attractive, depending upon your specific circumstances. Comparing these two options can be difficult, as there are multiple factors to weigh.

To help you lead you through a SEP vs. SIMPLE IRA analysis, we have created this flowchart. Through a series of decision points, you can collect the information necessary to guide you to the best decision. It covers pertinent factors, including:

• Business owner goals and preferences

• Size of business / employee headcount

• Employer and employee ability to contribute

• Contribution minimums and limits

SEP or SIMPLE IRA Download

Wondering if you should establish a SEP IRA Or A Simple IRA Plan For your Small Business? Click Here and grab our SEP or SIMPLE IRA Flowchart – INSTANT DOWNLOAD LINK.

 

SEP or SIMPLE IRA Questions

The questions we get about setting up a SEP or SIMPLE IRA are pretty similar and this post is intended to answer the general question we get on a regular basis. BayRock Financial is a registered investment adviser (RIA) providing Financial Planning and Fiduciary Investment Advice for clients. Information presented here is for educational purposes only and is in no way an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. All investments involve risk and, unless otherwise stated, are not guaranteed. Always be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here or anywhere. Past performance is no indication of future performance.

BayRock Financial may discuss and display charts, graphs, or images which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should never be used on their own to make investment decisions.

SEP or SIMPLE IRA Plans at Charles Schwab

Charles Schwab provides custodial services to clients of BayRock Financial and this article contains content from and links to the Charles Schwab website which is current as of November 25, 2022. Setting up a SEP or SIMPLE IRA Plan at Charles Schwab is easy for DIY Investors and while we are happy to recommend Charles Schwab for DIY Investors, BayRock Financial receives no compensation nor affiliate benefits when you choose to work with Charles Schwab.

Here’s the disclaimer posted on their website:

The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (Member SIPC), offers investment services and products, including Schwab brokerage accounts. Its banking subsidiary, Charles Schwab Bank, SSB (member FDIC and an Equal Housing Lender), provides deposit and lending services and products.

SEP or SIMPLE IRA Who is SEP for:

Owner-only businesses or those with just a few employees

Key features:

• No IRS filing or reporting

• Allows for contributions for you and any employees

• Easy to administer

SEP-IRA

SEP-IRA plans (Simplified Employee Pension) are designed to allow small-business owners or the self-employed to make sizable contributions to a retirement plan without filing a tax form. SEP-IRAs require little administration. A SEP-IRA is one of the easiest small business retirement plans to set up and maintain. You can make sizable contributions for yourself and any eligible employees. There’s little administration, and tax filing isn’t required. And you can vary contributions from year to year—or even skip a year.

Overview

• What are the fees and commissions?

  • $0 account open or maintenance fees. Other account fees, fund expenses, and brokerage commissions may apply1.

  • Account minimum: $0

  • Commissions: $0 per online listed equity trades;2 $0 per Schwab ETF online trade in your Schwab account3

  There are no fees to open or maintain your account. Other fees may apply; please see Account Pricing.

• What do I get with this SEP-IRA?

  Every Schwab account comes with one-on-one investment help and guidance. With this account, you’ll also get:

  • Tax-deductible contributions that vest immediately

  • Tax-deferred earnings

  • Flexible annual contributions

  • High contributions for you

  • A way to contribute to qualified employees’ accounts

  • Retirement planning tools and resources

  • 24/7 service and support

• How do I contribute?

  Once you have established your Schwab SEP-IRA plan, you may begin making contributions.

  • If you do not have employees, you can contribute to your account online by transferring funds from your Schwab brokerage account into your SEP-IRA (login required).

  • If you do have employees, you must contribute by mail. Contributions for employees cannot be made online.

   

  Establishing Your SEP IRA Plan for DIY Investors

  Follow these instructions for establishing and contributing to a SEP-IRA plan with Charles Schwab. Or, if you would like to meet with a Certified Financial Planner™ Professional at BayRock Financial to discuss questions related to any information provided here, please click here to book a Free CFP® Consult. We’re happy to meet via Zoom or Phone, just let us know your preference when you Click Here.

  

  SEP IRA Online Process with Schwab for DIY Investors:

  1. Review the basic plan document, which describes and governs your account, and keep it for your records.

  2. Print and complete the adoption agreement. Retain a copy and return the signed original to Schwab.

  3. Print and complete your account application. Retain a copy and return the signed original to Schwab.

  4. Print and complete your employer’s agreement. Retain a copy and return the signed original to Schwab.

  5. Read answers to frequently asked questions about the Schwab SEP-IRA.

  6. Optional: Review the benefits, features, and contribution eligibility of the plan.

  7. If you are a single owner sole proprietor, you can setup a SEP plan and open a SEP IRA online. You will be required to upload a signed Employer’s Agreement and Adoption Agreement during account open.

     Not a single owner sole proprietor? You can still open the account by paper application.

  SEP-IRA plans (Simplified Employee Pension) are designed to allow small-business owners or the self-employed to make sizable contributions to a retirement plan without filing a tax form. SEP-IRAs require little administration.

  Employees can contribute up to 25% of your annual income. If you’re self-employed, you can contribute 20% (after subtracting the self-employment tax deduction of your businesses’ net profit or equivalent to the employee percentage given).

  You can decide what amount to contribute each year, from $0 to the maximum SEP-IRA contribution, 25% of compensation (20% if you’re self-employed4) or $58,000 for tax year 2021 or $61,000 for tax year 2022, whichever is less.

  Rollover or transfer rules for a SEP-IRA are the same as traditional IRA plans. That means you can roll over funds to any qualified retirement plan, such as a 401(k).

  Distributions or withdrawals from a SEP-IRA are penalty-free after age 59½. If you do not start Required Minimum Distributions (RMDs) by age 72, you will face a 50% penalty on the total amount of the distribution. Withdrawals before age 59½ are subject to a 10% penalty.

  There are certain exceptions for which you can withdraw funds before age 59½ without taking a 10% penalty, including a rollover to another IRA, some higher-education expenses, qualified first-time home purchase expenses, death, disability, and certain medical expenses.

SEP or SIMPLE IRA

A SIMPLE IRA is a Savings Investment Match Plan for Employees (SIMPLE IRA) is an easy and low-cost way to set up a retirement program for self-employed individuals and small businesses with 100 or fewer employees. Eligible employees can fund their own SIMPLE IRA accounts through regular salary deferrals and Employers make additional contributions.

SEP or SIMPLE IRA Who a SIMPLE IRA for:

Businesses with up to 100 employees

Key features:

• Primarily funded with employee salary-deferral contributions

• Employer-matched contributions up to 3%

• An easy and economical plan to administer

SIMPLE IRA Overview

What are the benefits of a SIMPLE IRA?

• For Employers:

  • A way to contribute to your own retirement easily and regularly, and help your employees contribute to theirs

  • A low-cost plan funded mainly by employees

  • Business expense deductions for employee contributions

  • Easy administration with no tax filing

  • Retirement planning tools and resources

  • 24/7 service and support.

• For Participants:

  • Employer-matched contributions of up to 3% of annual compensation

  • Tax-deferred earnings

  • Pre-tax contributions for participants

Related Questions

Have questions about this type of account? Here are responses to some of the most common questions we hear. If you have a specific question that’s not answered here, please send us an email or book a free CFP® Consultation.

• How do I establish a SIMPLE IRA account?

  Get detailed instructions from your custodian on how to Establish Your Plan, or call BayRock Financial at 832-895-1700 if you have questions.

• Who is SIMPLE IRA for?

  A SIMPLE IRA may be appropriate for businesses with 100 or fewer employees seeking a low-cost plan that’s easy to administer and maintain. If you are self-employed or own a business with 100 or fewer employees, you are eligible to establish a SIMPLE IRA plan, as long as it is the only retirement plan you fund. Companies maintaining another employer-sponsored retirement plan in the same year are not eligible. You must generally include all employees age 21 and over if they received at least $5,000 in compensation during any two prior years and if you reasonably expect that they will receive at least $5,000 in the current year.

• What are SIMPLE IRA tax advantages?

  Employer contributions are tax-deductible. Earnings grow tax-deferred, and you pay no taxes on assets until you withdraw them in retirement.

• How is SIMPLE IRA funded?

  The plan is funded with contributions deducted from employees’ salaries, as well as annual employer contributions. Each eligible employee can decide whether or not to participate and how much to contribute, but employer contributions are mandatory.

• What are the SIMPLE IRA contribution limits?

  Employees can contribute up to 100% of compensation or a maximum of $13,500 for 2021 or $14,000 for 2022. If the employee is age 50 or over, they may contribute up to $16,500 in 2021 and $17,000 in 2022.

• When should I establish and fund my SIMPLE IRA?

  New plans must be established by October 1. Employer contributions must be made annually by the employer’s tax-filing deadline, including extensions. Employee contributions are deducted from employees’ salaries and must be deposited at least monthly.

• What do I need to know about administering a SIMPLE IRA?

  SIMPLE IRAs are easy to set up and maintain. IRS filing, tax reporting, and compliance testing are not required.Schwab reports all contributions and end-of-year fair market value on Form 5498 by May 31 each year.Full vesting is immediate

• What are the rules for withdrawing from a SIMPLE IRA?

  Withdrawals are penalty-free after age 59½. If you do not start Required Minimum Distributions (RMDs) by age 72 you may face a 50% penalty on the total amount of the distribution. Withdrawals before age 59½ are subject to a 10% penalty, and the penalty is increased to 25% if the withdrawal occurs within the first two years of participation in the SIMPLE IRA. There are certain exceptions for which you can withdraw funds before age 59½ without taking a 10% penalty, including:Rollover of distributions to another IRA or employer planHigher education expenses for you or family members, including tuition, fees, books, supplies, and room and board (must be enrolled at least half-time)First-time home purchase expenses ($10,000 lifetime limit) to buy, build, or rebuild a first home for you or your parents, children, or grandchildren (Note: You must not have owned a home within the past two years.)Death or disabilityBirth or adoption expensesCertain medical expenses, including qualifying health insurance costs for certain unemployed individuals and nonreimbursed expenses exceeding 7.5% of adjusted gross incomeWithdrawals made in equal installments over the account holder’s life expectancy

• What are the SIMPLE IRA rules?

  SIMPLE IRAs offer an easy way for business owners to contribute to a retirement plan while offering one to employees as well. These plans are low cost, easy to administer and maintain with no need to file with the IRS. You and your employees can contribute up to a maximum of $13,500 a year (for tax year 2021) and $14,000 a year (for tax year 2022), whichever is less. If you or your employees are over age 50, you can contribute an additional $3,000 (for tax year 2021 and 2022). With the matching option, you match the employee contribution dollar for dollar up to 3%, not to exceed the salary deferral limit for that year. In any two out of five consecutive years, you may match a smaller percentage, not less than 1%. You only contribute to the retirement accounts for the eligible employees who make salary deferral contributions.The nonelective contribution option requires that you contribute 2% of each eligible employee’s compensation up to a maximum of $5,800 (for tax year 2021) and $6,100 (for tax year 2022). Employees do not have to make contributions themselves

• What are the eligibility requirements for SIMPLE IRA?

  As an employer, you must employ 100 people or fewer, each of whom earned at least $5,000 during the previous year. This includes all employees, regardless of whether or not they are eligible to participate in your SIMPLE IRA plan. Employees who earned $5,000 are eligible for the SIMPLE IRA. Employees who are not eligible, or who can be excluded from the eligible category, include those who belong to organized unions and any nonresident alien employees who received no U.S. wages, salaries or other personal services compensation from you. You must establish a new SIMPLE IRA plan between January 1 and October 1 of the tax year unless your business is established after October 1. You may not maintain any other retirement plans such as SEP-IRAs, profit-sharing or 401(k) plans. (Unionized employees are an exception to this rule.) If the number of people you employ goes over 100, you can still maintain your SIMPLE IRA plan for two years after the first year the 100-employee limit is exceeded. After two years, if you still employ more than 100 people, you are no longer eligible to maintain a SIMPLE IRA plan.

Employers Easily Establish Your Plan at Schwab

Employers: Follow these instructions to establish and contribute to a new Schwab SIMPLE IRA Plan*. Need help? Call 832-895-1700.

1. Review the basic plan document, which describes and governs your account, and keep it for your records.

2. Print and complete the adoption agreement. Retain a copy and return the signed original to Schwab.

3. Print and complete your employer’s agreement. Retain a copy and return the signed original to Schwab.

4. Read answers to frequently asked questions about the Schwab SIMPLE IRA.

5. Optional: Review the benefits, features, and contribution eligibility of the plan.

Before Making Contributions to SIMPLE IRA

Once you have established your Schwab SIMPLE IRA plan, opened your own SIMPLE IRA, and opened SIMPLE IRAs for eligible employees (as applicable), you may begin making contributions. To fund your plan, print and complete the Contribution Transmittal Form. Be sure your check total matches the total amount of participant contributions. Mail your check and the transmittal form to the nearest Schwab operations center listed below:

Charles Schwab & Co., Inc. P.O. Box 628291 Orlando, FL 32862-8291 Charles Schwab & Co., Inc. P.O. Box 982600 El Paso, TX 79998-2600 *Note: Schwab does not accept the 5305 or 5304 IRS Model Plan, or any other provider’s Model Plan.

Participants – Enroll in Your Employer Plan

If your Employer has already established a Schwab SIMPLE IRA retirement savings plan to help you meet your retirement goals, and they have had advised you that you are eligible to participate, follow these instructions to open your SIMPLE IRA Account.

Your Employer should have already provided you with the Schwab SIMPLE IRA Enrollment Kit. Review the enclosed Employee Q& A and the Participation Notice & Summary Description included in that kit to learn all about the Schwab SIMPLE IRA.

1. Download, print and save the following documents below.

2. Click on Open a Simple IRA Account below to immediately open your account online.

If you prefer to open your new account by paper application, download the documents below, complete and return them to your Employer.

*Note: Schwab does not accept the 5305 or 5304 IRS Model Plan, or any other provider’s Model Plan.

Enrollment Instructions

1. Download and Read the Employee Instructions and follow the instructions if you plan to print, complete your application by paper.

2. Download and Complete the Elective Deferral Agreement. Be sure to indicate whether you want your salary deferred as a percentage or fixed amount. Return this document to your employer.

3. If choosing to complete your Schwab IRA Account Application by paper, complete the application and return it to your employer along with your completed Elective Deferral Agreement. Otherwise, click on “Open a SIMPLE IRA Account” to begin your enrollment and open your Account online.

NOTE: For questions or help completing the SIMPLE IRA forms, see your employer or Plan Administrator.