SEP IRA vs. Roth IRA

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If you're self-employed -- on either a full-time or part-time basis -- you can contribute toward your retirement through a Simplified Employee Pension Plan, or SEP-IRA. Smaller businesses may offer SEP-IRAs for their employees. The SEP-IRA is similar to a traditional IRA, although its contribution limits are higher. Roth IRAs differ significantly from SEP-IRAs, but both types of retirement vehicles have their advantages and disadvantages.

Tax Deductions

With a SEP-IRA, you may deduct your contributions from your gross income for tax purposes. While you can't deduct your Roth IRA contributions, you also don't pay taxes on withdrawals made in retirement.

Withdrawals

SEP-IRA withdrawal rules are the same as those for traditional IRAs. You must begin making withdrawals by the time you turn 70 1/2. It doesn't matter whether or not you have actually retired. Those withdrawals are subject to tax.

You don't ever have to withdraw funds from a Roth IRA. You can also continue to contribute to your Roth IRA once you're past 70 1/2, as long as you have earned income and meet the income limitations. As Fidelity Investments points out, you can also leave Roth IRA funds tax-free to your heirs.

Contribution Amounts

The contribution amount is a key difference between these two types of retirement accounts, and it's the reason CNN Money touts the SEP-IRA over the Roth IRA.

If you're under 50, you can contribute up to $5,500 annually to your Roth IRA. Once you hit 50, you can contribute up to $6,500 each year. Roth IRA eligibility is subject to income limitations. As of the time of publication, the modified adjusted gross income limit based on your federal tax filing status is:

  • Married filing jointly -- up to an AGI of $183,000, you can contribute the entire permitted amount. If your AGI ranges between $183,000 to $193,000, you may make a partial contribution. Over your AGI exceeds $193,000, you are excluded from contributing to your Roth IRA.
  • Single or head of household -- up to an AGI of $116,000, you are eligible for a full Roth IRA contribution. If your AGI ranges between $116,000 and $131,000, you may make a partial contribution. Once your AGI exceeds $131,000, you are ineligible for Roth IRA contributions.
  • Married filing separately -- your Roth eligibility depends on whether or not you lived with your spouse at any time during the tax year. If you did not, your eligibility is the same as those filing singly or head of household. If you did live with your spouse, and your AGI was less than $10,000, you can make a partial Roth IRA contribution. If your AGI was over $10,000, you are ineligible.

As of 2015, the SEP-IRA contribution limit is $53,000, which means you can't continue to contribute to your SEP-IRA once you've earned $265,000. The contribution limit changes annually with federal cost-of-living adjustments.

Tip

  • The SEP-IRA contribution limit applies to any of your qualified retirement plans, including 401(k)s offered through a primary employer if your SEP-IRA is funded through part-time or other work.

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