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 is the difference between a ROTH, SEP and Traditional IRA?

    The Roth IRA was established in 1996 as the newest addition to the individual retirement accounts (IRAs) available to individuals. ... Read Answer >>
  2. 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 >>
  3. How does a Simplified Employee Pension (SEP) IRA work?

    Learn about a Simplified Employer Pension, or SEP, IRA and how it works, who participates and what advantages it has over ... Read Answer >>
  4. Can an individual contribute to both a Roth IRA and a Traditional IRA in the same ...

    Yes, an individual can contribute to both a Roth IRA and a Traditional IRA in the same year. The total contribution into ... Read Answer >>
  5. Can a simplified employee pension (SEP) IRA be converted to a Roth IRA in the same ...

    Yes. An SEP IRA can be converted to a Roth IRA.As you may know, an SEP IRA is just a Traditional IRA that receives employer ... Read Answer >>
  6. How are Simplified Employee Pension (SEP) IRAs taxed?

    Understand the tax advantages of a Simplified Employee Pension IRA plan, and find out how both the employer and the employee ... Read Answer >>
Related Articles
  1. Retirement

    SEP IRA Limits in 2016

    Discover the SEP IRA limits for 2016. Included is a summary, plans that would be ideal candidates for SEP IRAs, and contribution and distribution rules.
  2. Retirement

    Roth IRA Contribution Limits in 2016

    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. ETFs & Mutual Funds

    IRAs and Roth IRAs

    What IRAs are: Tax-advantaged savings accounts for individuals. Pros: Tax benefits; investments grow tax-deferred and contributions may be deductible; numerous investment choices with range of ...
  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.
  6. Retirement

    Don't Make These Top 10 Mistakes On Your Roth IRA

    Don't lose out on the benefits of a Roth by contributing too much, breaking rollover rules or making other avoidable errors.
  7. Financial Advisor

    IRAs: Top Things You Need to Know About Them

    By understanding the major rules for both traditional and Roth IRAs, you'll be prepared to enjoy the benefits of these investment opportunities.
  8. Retirement

    IRA Contribution Limits in 2016

    Find out about the 2016 limits for contributions and income thresholds for individual retirement accounts, including traditional IRAs and Roth IRAs.
  9. Retirement

    Funding Your IRA vs. Your Roth IRA, Which First?

    The answer depends on where you are in your career and personal life each year. Here are some scenarios and rules to think about.
  10. Retirement

    How a Roth IRA Works After Retirement

    What retirees need to know about taxes, distributions and passing on your unspent savings to the next generation.
RELATED TERMS
  1. Individual Retirement Account - IRA

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

    An individual retirement plan that bears many similarities to ...
  3. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  4. IRA Plan

    A plan that individuals may establish to arrange and plan for ...
  5. Roth IRA Conversion

    A reportable movement of assets from a Traditional, SEP or SIMPLE ...
  6. IRS Publication 590: Individual Retirement Arrangements (IRAs)

    A document published by the Internal Revenue Service (IRS) that ...
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center