SEP IRA vs Roth IRA

Shawn Plummer

CEO, The Annuity Expert

Key Differences Of SEP IRA And Roth IRA

Eligibility and Contributions:

  • SEP IRA: Primarily for self-employed individuals or small business owners. Contributions are made by the employer only.
  • Roth IRA: Available to anyone with earned income within certain income limits. Contributions are made by the individual with post-tax dollars.

Contribution Limits:

  • SEP IRA: Up to 25% of the employee’s compensation or a maximum of $61,000 for 2023. In 2024 it increases to $69,000.
  • Roth IRA: Up to $6,500 ($7,500 if age 50 or older) for 2023. In 2024 those numbers increase to $7,000 and $8,000.

Tax Treatment:

  • SEP IRA: Contributions are tax-deductible, but withdrawals during retirement are taxed.
  • Roth IRA: Contributions are made with after-tax dollars, but withdrawals during retirement are tax-free.

Withdrawal Rules:

Related Reading: When can I withdraw from Roth IRA

Sep Ira Vs Roth Ira

Examples

  1. Self-Employed Individual: A freelancer might prefer a SEP IRA for its higher contribution limits and tax-deductible contributions.
  2. Young Professional: An individual in their early career might choose a Roth IRA to benefit from tax-free growth and withdrawals in retirement.

Comparison of SEP IRA and Roth IRA

FeatureSEP IRARoth IRA
EligibilitySelf-employed, small business ownersIndividuals within income limits
ContributionsEmployer only, up to 25% of compensationIndividual, with post-tax income
Tax TreatmentTax-deductible contributionsTax-free withdrawals
Contribution LimitsUp to $69,000 (2024)Up to $7,000 ($8,000 if 50 or older) in 2024
Withdrawal AgePenalties before age 59½Contributions can be withdrawn any time
RMDsStart at age 73None
Sep Ira Vs Roth Ira

Conclusion

Choosing between a SEP IRA and a Roth IRA depends on individual circumstances like employment status, income, and retirement goals. SEP IRAs are suitable for self-employed individuals or small business owners, offering higher contribution limits and tax-deductible contributions. Roth IRAs are ideal for those who expect to be in a higher tax bracket at retirement, offering tax-free growth and withdrawals. Understanding these differences is crucial for making an informed decision.

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Frequently Asked Questions

Does a SEP IRA reduce self-employment tax?

Contributing to your employees’ SEP IRA can lead to tax benefits for self-employed individuals and small business owners. For the former, both income tax and self-employment tax can be reduced; for the latter, income tax is lower, and contributions are exempt from Medicare and Social Security taxes.

At what age does a Roth IRA not make sense?

It’s a good idea to consider opening a Roth IRA regardless of your age. If you decide to open one later in life, you can avoid the early withdrawal penalty if you reach 59½ years old. Just remember that regardless of when you open the account, you’ll need to wait five years before being able to withdraw the earnings without paying taxes.

Can I transfer money from a SEP IRA to a traditional IRA?

Yes. The main distinction is that an employer can contribute to a SEP IRA, whereas only individuals can contribute to a traditional IRA. Therefore, you can merge a SEP IRA with a traditional IRA without consequences other than determining who can contribute.

Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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