If you are a small business owner and want to start a retirement plan, here are two plans you might want to consider: the SEP IRA and the SIMPLE IRA.

SEP IRA (Simplified Employee Pension Plan – IRA)

• Eligibility: Any business owner or self-employed individual can start a plan.
• All employees who have worked for 3 of the past 5 years and who earned at least $450 last year are eligible for coverage.
• Funded by tax-deductible employer contributions.
• Employees cannot contribute.
• Contribution limits: 25% of compensation up to $44,000 if you are an employee of your own corporation; 20% of self-employment income (if self-employed) up to $44,000.
• Vesting is immediate (there is no waiting for “ownership” of contributions).
• Contributions do not have to be made every year.

SIMPLE IRA (Savings Incentive Match Plan for Employers – IRA)

• Eligibility: Employers with 100 employees or less who do not maintain any other retirement plan can start a plan.
• Employees are eligible to participate if they have earned more than $5,000 in any two years prior and who will earn at least $5,000 this year.
• Employees can contribute up to $10,000.
• Employer can provide up to 3% match or 2% non-elective match for all employees up to $4,400 per employee.
• An employer can contribute $10,000 to his/her own account plus a match of 3%.
• Additional contribution by employee of $2,500 if age 50 or older.
• Vesting is immediate (there is no waiting for “ownership” of contributions).

What is one important difference between these plans?

• In the SEP IRA, the employer makes the contribution.
• In the SIMPLE IRA, the employee makes the contribution but there is an employer match.

Resources:

SEP IRA from Wikipedia, the free encyclopedia: http://en.wikipedia.org/wiki/SEP_IRA

Retirement Plan Frequently Asked Questions (FAQs) about SIMPLE IRA plans from the IRS: http://www.irs.gov/retirement/article/0,,id=111420,00.html