401(k) vs. SEP IRA: Which is Right for Your Business?

Choosing the right choice of 401(k) vs. SEP IRA is crucial for small businesses aiming to attract and retain talent while ensuring financial stability. Two popular options are the 401(k) and the Simplified Employee Pension Individual Retirement Account (SEP IRA). Understanding their differences can help you determine which aligns best with your company's needs.

401(k) Plans

A 401(k) is a retirement savings plan that allows both employers and employees to contribute. Employees can defer a portion of their salary into the plan, often with pre-tax dollars, reducing their taxable income. Employers may choose to match contributions, enhancing the plan's attractiveness.

Key Features:

• Employee Contributions: 

  • Employees can contribute up to $23,000 in 2024, with an additional catch-up contribution for those aged 50 and above.

• Employer Contributions: 

  • Employers can match employee contributions, fostering employee participation and loyalty.

• Administrative Responsibilities: 

  • 401(k) plans require annual filings, such as Form 5500, and must adhere to specific testing to ensure fairness across all employee levels.

SEP IRA

A SEP IRA is designed for small business owners and self-employed individuals. In this plan, only employers make contributions, which are tax-deductible and can vary each year based on business performance.

Key Features:

• Employer Contributions Only: 

  • Employees cannot contribute; only employers fund the plan.

• Contribution Limits: 

  • Employers can contribute up to 25% of an employee's compensation, with a maximum limit set by the IRS.

• Simplicity: 

  • SEP IRAs are easier to establish and maintain, with fewer administrative requirements compared to 401(k) plans.

Comparative Overview

401(k) vs. SEP IRA: Which Is Right for Your Company?

• Choose a 401(k) if:

  • You want to offer a competitive benefit that allows both employer and employee contributions.

  • You're prepared to handle the administrative responsibilities.

  • You aim to provide higher contribution limits and potential Roth options.

• Choose a SEP IRA if:

  • You prefer a straightforward, low-maintenance plan.

  • Your business profits fluctuate, and you want flexibility in contribution amounts.

  • You have a small team or are self-employed without employees.

Selecting the appropriate retirement plan depends on your business's size, financial goals, and administrative capacity. Worklife Benefit Consultants specializes in helping small businesses navigate retirement plan options, ensuring you find the right fit to attract and retain top talent while maximizing tax benefits.

📩 Ready to optimize your benefits strategy? Contact us today to explore the best retirement plan for your business!

Sources:

• Human Interest: 401(k) vs. SEP IRA for small businesses

• Investopedia: SEP IRA vs. Solo 401(k): Which Is Better for Business Owners?

• Fidelity: Small-business retirement plans comparison

• Ascensus: What small business owners need to know: Changing a SEP IRA to a 401(k) plan

Note: Contribution limits are subject to change; always refer to the latest IRS guidelines for the most current information.