Loading the player...
A:

SEP IRA

  1. Established and funded by a business (including a sole proprietorship)
  2. Must be established and funded by the employer's tax filing deadline, including extensions
  3. Contribution limit is 25% of compensation or $45,000, whichever is less. For a sole proprietor, the contribution limit is 20% of the sole proprietor's adjusted net business income
  4. Contribution within the limits is deductible on the employer's business tax return
  5. Earnings grow on a tax-deferred basis
  6. Distributions will be treated as ordinary income and subject to income tax and early withdrawal penalties if you are under age 59.5 when the withdrawal is made, unless you are eligible for an exception

Roth IRA

  1. Established and funded by the individual taxpayer
  2. Must be established and funded by individual taxpayer's tax filing deadline (usually April 15), extensions not included
  3. Contribution limit is the lesser of 100% of compensation or $4,000 ($5,000 if you are at least age 50 by the end of the year for which the contribution is being made)
  4. Contributions are not deductible
  5. Earnings grow on a tax-free basis (certain rules apply)
  6. Qualified distributions are tax and penalty free

If you fund an SEP IRA and then convert those assets to a Roth IRA, the converted amount will be treated as ordinary income and subjected to income tax for the year you convert the assets.

Here are some additional points to consider:

Choosing the right plan type for your business (including sole proprietorship) - When you are trying to choose the best plan for your business, the options you consider are usually SEP IRAs, SIMPLE IRAs or qualified plans (such as profit sharing, money purchase, 401k plan etc.). (See our article Plans The Small Employer Can Establish for more information on these employer plans.)

Choosing the right type of IRA - In addition to your sole proprietorship making an employer contribution to an SEP IRA, you may also make an individual participant contribution to a Roth or Traditional IRA.

Generally, SEP IRAs and Roth IRAs are not substituted for each other, as they are two different types of retirement plans. An individual may be able to participate in both, if he or she meets the eligibility requirements. Consult with your tax professional to ensure that you choose the plan best suited to your financial profile.

This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS
  1. What are the main differences between a Simplified Employee Pension (SEP) IRA and ...

    Discover the difference between a simplified employee pension IRA and a traditional IRA so that you can choose the best retirement ... Read Answer >>
  2. Is a Simplified Employee Pension (SEP) IRA tax deductible?

    Learn everything you need to know about your SEP IRA, including the benefits to employers and whether or not a SEP IRA is ... Read Answer >>
Related Articles
  1. Retirement

    Traditional or Roth IRA: What's the Difference?

    Traditional IRAs and Roth IRAs have similarities and differences investors need to know.
  2. Retirement

    Roth IRA Contribution Limits for 2017 Taxes

    Discover the benefits of Roth IRA accounts and how much you can contribute for your retirement. Learn which IRA plan is best for you.
  3. Retirement

    Individual 401(k) vs SEP IRA: Deductions & Contributions

    If you are self-employed, here are the pros and cons of individual 401(k)s and SEP IRAs.
  4. Retirement

    Roth IRA Contribution Rules: The Basics

    What you need to know about Roth IRA contributions – from eligibility to dollar limits, deadlines to tax breaks.
  5. Retirement

    How Much It Takes to Max Out Your IRA

    IRAs have certain tax advantages that allow your nest egg to grow at a faster rate. But there are annual limits on how much you can contribute.
RELATED TERMS
  1. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  2. Roth IRA

    A Roth IRA is an individual retirement plan that bears many similarities ...
  3. Roth IRA Conversion

    A reportable movement of assets from a Traditional, SEP or SIMPLE ...
  4. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  5. Recharacterization

    The treatment of a contribution as being made to another type ...
  6. Ordering Rules

    The order in which Roth IRA assets are distributed. Assets are ...
Hot Definitions
  1. Five Cs Of Credit

    A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics ...
  2. Straddle

    An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration ...
  3. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  4. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  5. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  6. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
Trading Center