Both the traditional IRA and the SEP-IRA are excellent retirement savings vehicles. If you work a traditional job and have income on a side from self-employment or a business you own, you can take advantage of the tax savings and tax deferred growth of both plans. Many workers today run their own businesses on a part time basis, and an SEP-IRA provides a great way to put extra money aside while saving money on current taxes.
You must have earned income equal to or greater than the amount you contribute to your traditional IRA account. That means that if you plan to contribute $5,000 to your IRA, you must have at least $5,000 worth of earnings shown on your W-2 form. For 2010 and 2011, you can contribute up to $5,000 to your traditional IRA. If you are 50 years of age or older, you can contribute an extra $1,000 to the plan, for a total of $6,000.
Self-Employment or Business Income
If you have income from self-employment, such as freelance work or consulting jobs, you can open an SEP-IRA and use it to shelter some of that income from taxes. You can also use an SEP-IRA if you own a small business. The money you contribute to the SEP-IRA grows on a tax-deferred basis all the way out to retirement, making it an excellent choice for self-employed individuals and small business owners. For 2010, you can contribute up to 25 percent of your earnings, up to a maximum of $49,000.
Opening both an SEP-IRA and a traditional one should not be an expensive undertaking. There are a number of administrators who can handle both accounts, including brokerage firms, mutual fund companies and banks. Both traditional IRAs and SEP-IRA are reasonably easy to open and maintain, and many administrators handle those accounts without an annual maintenance fee. You might be able to get a bigger bang for your buck and better service by holding both your SEP-IRA and your traditional IRA with the same institution. Many brokerage firms and mutual fund companies, for instance, waive certain fees and provide extra services for accounts over a certain size.
Preparing Your Taxes
If you have both traditional wage income and income from self-employment, you might want to consult with a CPA before making your IRA contributions and starting your tax return. A CPA can help you identify business exemptions and deductions you might have missed, as well as help you determine the maximum you can contribute to your SEP-IRA based on your previous year's business or self-employment income. If you prefer to do your taxes yourself, look for a tax preparation software package that provides support for home based businesses or business income. The standard versions are unlikely to include support for SEP-IRA and other business retirement plan contributions.