Traditional IRAs and Roth IRAs aren't exclusive to the self-employed, but people who work independently or who own their own business can contribute to these plans. Traditional IRAs allow you to make tax-deductible contributions and Roth IRAs allow you to make after-tax contributions, and money grows tax-free. The ability to contribute to both an SEP and a Roth is an advantage for the self-employed, since it makes it a little easier to save. The rules are detailed on the IRS website.
The biggest difference between an SEP (simplified employee pension) and a Roth IRA is that the SEP has much higher contribution limits. You think a Roth IRA isn't as attractive because you think you're now in a higher tax bracket than you'll have during retirement. However, your contributions to an employer's 401 (k) plan for a full-time job do affect the amount you can contribute to an individual 401 (k) plan for self-employment income. Roth plans require you to contribute money after taxes, but they allow you to deduct any withdrawals you make during retirement.
An SEP allows you to make pre-tax contributions in a similar way to a traditional IRA, reducing your taxable income rather than after-tax contributions, such as a Roth IRA. However, keep in mind that contribution limits for accounts with tax requirements, such as IRAs, are not considered separately. At first glance, these figures make it seem unlikely that a self-employed person with a solid income will be entitled to contributions. Roth IRAs only allow after-tax contributions instead of tax-deductible contributions, as in traditional IRAs.
However, the contribution limits for the SIMPLE IRA are significantly lower than those of an SEP IRA or an individual 401 (k), and you may have to make mandatory contributions to employee accounts, which can be expensive if you have a large number of employees participating. You may also want to keep your Roth IRA at the same company that offers SEP or other types of IRAs. You should be able to find broad-based, low-fee funds for your Roth IRA with an expense ratio of less than 0.25% per year. If you are self-employed and have no other employees or have a high employee turnover, an SEP IRA may be a good solution for your retirement needs.
While small business owners enjoy a little more flexibility when it comes to determining their retirement options, calculating whether to invest in an individual Roth retirement plan or a simplified IRA for employees (or both) depends on how each fits your personal retirement plan preferences. Keep in mind that contribution limits apply per person, not per plan, so if you also have an outside job that offers a 401 (k) plan, or your spouse has one, the contribution limits cover both plans. The downside for you, as the business owner, is that you have to make contributions for employees, and these should be equal not in dollars, but as a percentage of the salary to those you make for yourself. It's true that the ability to make contributions to the Roth IRA is phased out or completely eliminated if your modified adjusted gross income (MAGI) exceeds certain levels.