Understanding IRAs: The differences between SEP, Simple and Payroll Deduction IRAs

The U.S. Department of Labor estimates that Americans will need 70 to 90 percent of their pre-retirement income to maintain their current standard of living when they stop working.

For many, that’s going to be a big problem. “A third of people (36 percent) in the U.S. have nothing saved for retirement,” Nanci Hellmich, personal finance writer for USA Today, writes.

As a small to mid-sized business owner, you have the opportunity to help your employees plan for retirement with an IRA.

What is an IRA? An individual retirement account (IRA) acts as a savings account with valuable tax breaks, making this financial tool a great option to help your employees save.

Why set up an IRA? Tax benefits. Money saved in the plan grows tax-free – employees won’t be taxed until they withdraw their money. As an employer, your contributions are deducted from your income.

IRA-based retirement plans

Simplified Employee Pension A simplified employee pension (SEP) is an option you can set up for you and your employees. Employers have to contribute a uniform percentage to each employee, although contributions are not required each year.

Key points:

  • Any employer with one or more employees is eligible.
  • You, as the employer, make the sole contributions.
  • You have the ability to decide if you want to contribute year-to-year.


A SIMPLE IRA allows your employees to contribute a percentage of their salary and requires your contribution as employer.

Key points:

  • Only employers with 100 or fewer employees are eligible.
  • Both you and your employees may contribute.
  • Your employees have the option to decide how much they contribute, and you must match that amount or pay two percent of every employee’s compensation.

Payroll deduction Some small business owners decide not to set up a retirement plan. That’s okay! If you choose that option, your employees are still able to contribute to an IRA through payroll deduction.

Key points:

  • Any employer with one or more employees is eligible.
  • Your employees can decide how much to contribute at any time.


No matter what plan you select, Northwest has a wide range of services available to meet your needs. We will also give you the attention to communicate the details to both you and your employees. Visit your local Northwest office or call us at 1-888-261-5673 to discuss your options.