Can I continue to contribute to my Roth IRA after my SEP IRA is set up?
I am an independent contractor who is considering setting up a SEP IRA account. In the past, I have only contributed to a Roth IRA, but I would like to put more money away for retirement. I am under the income limits.
SEP IRA Contributions and Roth IRA Contributions are independent of one another. You can contribute the annual Traditional/Roth IRA limit ($5,500/year or $6,500 over age 50) to your SEP IRA, instead of setting up a separate Traditional IRA account. For Roth, you can contribute to a Roth up to a limit, and to a SEP, up to the SEP limit.
A SEP IRA is like a 401(k) or 403(b) being an employee benefit account. You can view contribution limits here. However, keep in mind that Required Minimum Distributions (RMDs) are mandated later, and you may be subject to a tax penalty per the IRS restrictions here. Opening a third "bucket" in the form of an individual taxable account with a diversified and low-cost ETF portfolio could be an excellent general purpose account if you want more usage flexibility later.
Absolutely! The SEP IRA and Roth IRA combination are wonderful together. The only time I would discourage you from contributing to the SEP in addition to the Roth would be, 1) if you otherwise would not be disciplined enough to save (and not spend) the savings, and 2) your income tax bracket is 15% or lower.
Congratulations on thinking ahead. Being an independent contractor gives you lots of flexibility to customize a retirement plan that’s right for you.
First thing first, having a SEP does not preclude the continuation of Roth contribution. Thus, you can continue to fund SEP & Roth at the same time.
Secondly, besides SEP, SIMPLE or 401k could be another option. All depends on your earning ability, employees, and the asset protection. If you want to maximize your contribution to a retirement plan, both SEP and 401k will do. SIMPLE has the lowest contribution in comparison to the other two choices. Caveat: SEP does not have the age-catchup like the 401k does. In other words, once you turn age 50+, you can make another $6k contribution to a 401k, but you can’t do that to a SEP. The second factor to consider is the demographics of your employees. Again both SEP and 401K require the funding/matching from the employer, which can be costly. For a SEP, the funding is solely from the employer. So, if you have lots of part-timers, this could be some financial burdens. On the other hand, contributing to an employee’s retirement plan could also build up the loyalty to you. If you don’t have any employees, a Solo 401k or Individual (k) could be an excellent choice. Lastly, 401k is under the ERISA law, which offers much needed asset protection to a small business owner/independent contractor; whereas SEP has limited creditor protection.
Bottom line: Seek a consultation from a CFP® to see what options you have and which one may work out the best to your advantage. Best!