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Sep IRA vs Simple IRA: Which Is Right For You?


Sep Ira vs. Simple IRA: Most people who work with employers that offer 401(k) plans are automatically enrolled in the program, which means they’re contributing to it voluntarily or involuntarily. If you’re not happy with your employer’s 401(k) plan, you might be able to contribute to an IRA (Individual Retirement Account). You have two choices here: you can either contribute to a traditional IRA or a Roth IRA; this article will explain the differences between these two accounts and help you decide which one might be right for you.

Sep Ira vs. Simple IRA: Which is Right for You

The Difference Between Traditional IRAs And SEP IRAs

SEP IRAs and traditional IRAs share some common ground but also crucial differences. SEP IRAs are only available to employers with more than one employee, for starters. If you’re a solo entrepreneur, you can probably ignore SEP IRAs entirely; your plan will likely be a traditional IRA instead. If you have employees, though, a SEP IRA could make sense. For example, if you own an LLC that employs multiple people (whether as independent contractors or regular W-2 employees), SEP IRAs may be right. Traditional IRAs are available to anyone with earned income from self-employment or work as an employee of any type (note that there are income limits to make traditional and Roth contributions). Like SEP IRAs, traditional IRAs allow you to contribute up to $5,500 per year in 2017 ($6,500 if you’re 50 or older) into tax-advantaged savings accounts.

The significant difference between these two types of plans is how they treat earnings: Both versions offer tax advantages by allowing gains on investments to grow without being taxed annually until withdrawn. However, in a traditional IRA account, withdrawals are taxed at ordinary income rates—which means those who fall into higher tax brackets pay more in taxes on their leaves. However, earnings are always taxed at typical income rates in a SEP IRA. This makes them ideal for business owners who expect to earn significant amounts of money through their business(es) over time. And since you don’t need earned income from employment to open a SEP IRA, it’s possible for all sorts of entrepreneurs to benefit from having one—even if they don’t have employees themselves! In addition, employer contributions made on behalf of eligible employees are deductible when calculating taxable income. This can help reduce your overall tax burden significantly. So which is better? That depends on what kind of business owner you are and what type of retirement lifestyle you want.


How A SEP Works, Who Can Use It, How Much You Can Contribute, etc.

A SEP, or Simplified Employee Pension, is a retirement plan that allows employees to contribute a portion of their income to an employer-administered retirement account. The contributions are usually fixed and made monthly. Unlike with traditional IRAs, however, you don’t get to decide how much you’re going to save–that’s up to your employer. Furthermore, there’s no age limit with traditional IRAs; anyone from 18 years old to 70+ can benefit from a SEP because they let you contribute based on your earnings (and even then, it only goes down until you hit $56k). Suppose that sounds like it could be right for you; head over here. Otherwise, skip ahead to read about what a SIMPLE IRA is.


The Difference Between ROTH IRAs And Traditional IRAs

ROTH IRAs, or Roth Individual Retirement Accounts, are designed to give you a leg up in retirement. The significant advantage of ROTH IRAs, if you meet specific income requirements, is that they offer tax-free withdrawals after age 59 1/2 and no penalties for early withdrawal. Traditional IRAs are slightly different; they allow your contributions to grow tax-deferred but don’t offer any unique tax advantages on your withdrawals. For example, your ROTH IRA withdrawals will be 100% taxable under current law, whereas traditional IRA withdrawals may be partially taxable. To decide which one is right for you, consider what your future tax rate might look like. If it’s likely higher than it is now (because your income will probably increase), then a ROTH IRA could work out better for you because it’ll lower your overall tax bill. However, if taxes are likely to go down when you retire (for instance, because some deductions might disappear), then a traditional IRA might make more sense since it’ll provide more savings on taxes now. To get started with either type of account, visit IRS Publication 590 at It has everything you need to know about two kinds of reports and how to open them. You can also call 888-829-5500 for free help from IRS agents. They’re available Monday through Friday from 7 a.m.-7 p.m., Eastern time, except on federal holidays.*

Sep Ira vs. Simple IRA: Which is Right for You

How A ROTH Works, Who Can Use It, How Much You Can Contribute, etc.

A Roth account allows you to contribute after-tax while having that money grow completely tax-free. It’s important to note that not everyone qualifies for a Roth IRA. If your income exceeds certain levels, you may not be eligible to contribute. For example, if you are single and have an adjusted gross income (AGI) of $114,000 or more in 2014 ($181,000 or more if married and filing jointly), contributions cannot be made to your account. To get started with a ROTH IRA, it’s best to talk with a financial advisor because each person has their own unique set of circumstances. These should all be considered when setting up an investment strategy based on your risk tolerance level. The tax advantages of a Traditional IRA compared to a ROTH: With a traditional IRA, there are no restrictions on how much you can contribute—so long as you qualify—but only those who fall under certain income limits can benefit from making nondeductible contributions. In other words, most people will pay taxes on their deductible traditional IRA contributions (assuming they don’t invest through an employer plan). Once they begin withdrawing funds at retirement age, those withdrawals will be taxed as ordinary income regardless of whether they were deducted from taxable income during initial deposits.


Sep IRA vs Simple IRA Comparison Chart

At its most basic, an Individual Retirement Account (IRA) is a tax-advantaged retirement savings plan. Traditional IRAs allow people to defer taxes on their income until they withdraw funds in retirement. Meanwhile, a Simplified Employee Pension (SEP) plan will enable businesses and self-employed individuals to establish tax-advantaged savings account that supplement traditional employer pension plans. Together, these three types of accounts comprise a robust suite of options that have allowed millions of Americans to accumulate trillions of dollars in assets throughout their working lives. Although you can use both SEPs and Traditional IRAs concurrently, most individual taxpayers choose between one based on how they’re structured and whether they are eligible to contribute pre-tax or after-tax money. If you’re wondering which type of IRA is right for your situation, you need to know about each option.


Additional Facts About Each Type Of Account

With a SEP-IRA, you can have higher contribution limits. But only self-employed individuals can contribute. You can have higher contribution limits with a SIMPLE-IRA, but only if your employer sets up an eligible SIMPLE 401(k) plan with an employer contribution (again, no gifts are allowed without an employer match). Both SEP and SIMPLE IRAs allow tax-deductible contributions and growth. And both let you make catch-up contributions. But—and it’s a big but—the types of investments permitted in each account differ pretty dramatically. In a SEP-IRA, you can invest in almost anything. In a SIMPLE IRA, however, you’re limited to mutual funds or annuities that provide permanent coverage (as opposed to term life insurance policies). There are strict rules about which types of funds qualify. If you’re self-employed or don’t work for an employer that offers any retirement plans, then a SEP is probably best for you; otherwise, consider going with a SIMPLE because its investment options may be more flexible than those offered by your company’s retirement plan. Of course, consult with your financial advisor before deciding which type of account might be right for you.

Sep Ira vs. Simple IRA: Which is Right for You

Additional Facts About Making Contributions Before Taxes Are Due.

The main advantage of an individual retirement account (IRA) is that contributions are tax-deductible, and earnings accumulate on a tax-deferred basis. The disadvantage of a traditional IRA or an employer-sponsored plan such as a 401(k) or 403(b) is that contributions may be limited based on income level, and employees are taxed when they withdraw their funds. The good news is you can use both a traditional and a Roth IRA to help meet your retirement goals. Contributing to both accounts offers several benefits: Tax deferral – Your contributions aren’t taxed until withdrawal in retirement years. This gives your money more time to grow without being subject to taxes. For example, if you earn $50,000 per year and contribute $5,000 per year into a traditional IRA from age 25 through 65 at a 6% annual growth rate, you would have about $1 million by age 65. If you contributed $5,000 per year into a Roth IRA from age 25 through 65 at a 6% annual growth rate (assuming no additional income earned), you would have about $1 million by age 65. However, because withdrawals from a Roth IRA are tax-free during retirement years while exiting from a traditional IRA are taxable at ordinary income rates up to 39%, most people will have significantly more money in their pocket with a Roth than with a conventional IRA over time.

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Final Thoughts About Sep IRA vs Simple IRA

The most important thing you can do when choosing a retirement account (or multiple retirement accounts) is maximizing your long-term investment gains. All other considerations are secondary, so think carefully about how much time and effort you’re willing to manage your investments or whether you should choose a Robo-advisor. And don’t be afraid to go with more than one type of retirement account! Your 401(k) might not have what you want right now, but that could change in just a few years. Plus, several types of retirement accounts to choose from that offer different tax benefits and long-term growth opportunities. For example, some people like having an Individual Retirement Account (IRA) and a 401(k). IRAs often allow for more options and lower fees than many employer-sponsored plans. However, they aren’t available if you work at a company without an onsite plan—and they may not be as generous with matching contributions. It’s up to you to decide which combination makes sense based on your current financial situation and future goals. But remember that once money goes into any retirement account, it can’t be taken out until age 591⁄2 without incurring significant penalties. So make sure your decision will last before you invest any money!

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