SIMPLE or SEP: What's Right for You?

If you are a small business owner or a self-employed individual, deciding on the best retirement plan can be complicated. So, let's make it SIMPLE or SEP.

Take a look:1

      Simple or SEP

Simplified Employee Pension Plan (SEP)   SIMPLE IRA
Contribution source The employer makes contributions for all eligible employees to an employer-sponsored plan. Employees make contributions along with employer contributions to an employer-sponsored plan. 
Target business Small businesses and self-employed individuals. A business with less than 100 employees.
Eligibility Employees must be 21 or older, have worked for an employer in 3 of the past 5 years, and earned at least $550. Employees who earned at least $5,000 during any 2 previous years and are expected to again in the current year.
Contribution amounts An employer can make deductible contributions, up to 25% if incorporated, 20% if non-incorporated, of each employee's compensation, up to $49,000. Compensation is limited to $245,000 for this calculation.2 Employees can contribute through payroll deduction the lesser of: $11,500 for 2009, OR 100% of earned income. Catch-up contributions of $2,500 are allowed for 2009 for people 50 and over.3
Contribution flexibility Contributions are discretionary. An employer must contribute either: 100% match of employee contributions up to 3% of compensation, OR a non-elective 2% contribution on the first $245,000 of compensation for each eligible employee.
Plan establishment deadlines Contributions can be made up to the due date of employer's tax return, including extensions. The plan must be set up by Oct. 1 and employees must be notified 60 days prior to the effective date of the plan. Employer contributions must be made by the date of the employer's tax return due date, including extensions.
Vesting 100% immediate vesting. 100% immediate vesting.
Distribution rules Withdrawals may be taken immediately and are included in the recipient's gross income. If taken before age 59 ½, withdrawals are subject to an additional 10% penalty, except in special situations and for qualified expenses. Distributions must begin by April 1 of the year following the year the individual reaches age 70 ½. Distributions are based upon life expectancy as determined by the Uniform Table. Withdrawals taken during the first 2 years of participation are included in the recipient's gross income and are subject to a 25% penalty, thereafter 10% unless participant is age 59 ½ or older. Exceptions exist for special situations and qualified expenses. Distributions must begin by April 1 of the year following the year the individual reaches age 70 ½. Distributions are based upon life expectancy as determined by the Uniform Table.

1 Based on current tax law.

2 Indexed for cost of living increases.

3 Match may be reduced to 1% for two of five years.
Thomas M Stock : Northwestern Mutual
282 Memorial Ct Ste B • Crystal Lake, IL • 60014-6277
Phone: 815-444-3766
thomasstock.nmfn.com
 

© 2010, The Northwestern Mutual Life Insurance Company/Northwestern Mutual, Milwaukee, WI. All rights reserved. 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202-4797 - (414) 271-1444.

Before you agree to receive financial planning services, please see complete information and disclosures in the NMIS Financial Planning Brochure (also called the ADV brochure) and review the terms of the NMIS Planning Engagement Agreement. These may be obtained from your Financial Advisor.

Northwestern Mutual Financial Network is the marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM), and its subsidiaries and affiliates. Thomas M Stock is an Insurance Agent of NM (life insurance, annuities and disability income insurance) and Northwestern Long Term Care Insurance Company, Milwaukee, WI, a subsidiary of NM (long-term care insurance), and a Registered Representative and Investment Adviser Representative of Northwestern Mutual Investment Services, LLC, 5215 Old Orchard Rd Suite 1200, Skokie, IL 60077-1088, 847-663-7000, a wholly-owned company of NM, broker-dealer, registered investment adviser and member FINRA (www.finra.org) and SIPC (www.sipc.org). NM and The Kratochvil Group are not broker-dealers or registered investment advisers. There may be instances when this agent represents insurance companies in addition to NM or its affiliates.

The products and services referenced are offered and sold only by appropriately appointed and licensed entities and Network Representatives. Network Representatives and their staff might not represent all entities shown or provide all the services discussed on this Web site. Not all products and services are available in all states.

Thomas M Stock is primarily licensed in Illinois and may be licensed in other states.