Traditional, Roth and SEP IRAs can serve different purposes for different people. A traditional IRA offers you a tax deduction when you make a contribution. If you have self-employment income, an SEP IRA will allow you to contribute more to retirement than a traditional or Roth IRA. Simply put, Roth IRAs are particularly good for people who expect to pay a fairly high tax rate when they retire.
That includes many people who are self-employed, such as small business owners who could withdraw money from their companies later in life. Unlike a traditional IRA, with a Roth IRA, you won't get an immediate tax deduction or reduce your gross income. Instead, people who are self-employed with a Roth IRA pay taxes on their annual contributions. This means that when you retire, your withdrawals are not considered taxable income.
Also, unlike a traditional IRA, there is no mandatory distribution when you turn 70 and a half years old with a Roth IRA. People can start accessing traditional IRA funds starting at age 59 and a half, and at age 70 and a half, they must start withdrawing a taxable amount from their account. However, if you make a withdrawal within the first two years of participating in a SIMPLE IRA, the 10% penalty is increased to 25%. Even if you participate in a retirement plan as a self-employed person (including the SEP IRA or SIMPLE IRA), you can still participate in a traditional IRA or a Roth IRA.
So, you can maximize your contributions to any of the above retirement plans and still make the most of your own personal IRA. A SIMPLE IRA may be easier for an employer to set up than many 401 (k) plans, which have complex rules. However, keep in mind that contribution limits for accounts with tax requirements, such as IRAs, are not considered separately. You'll enjoy all the benefits of an IRA, including tax-deferred growth, and you'll be able to take advantage of what many experts consider to be the best functioning retirement account: the Roth IRA.
Individuals can contribute up to 25 percent of their net compensation. As with a traditional IRA, money in an SEP plan isn't taxed until it's withdrawn. An SEP IRA allows a company to make employer contributions to employees, including the self-employed. A Roth IRA is a type of retirement account that allows people to contribute after-tax money to an account.
Self-employed workers have several plan options, including defined contribution plans, such as an individual 401 (k) plan, SEP IRA, and SIMPLE IRA. The individual 401 (k) plan has even another more subtle benefit that may make it a better choice than the SEP IRA for people with low incomes or for those who use their business as a side job. A simplified employee pension plan, or SEP plan, is a type of IRA for small business owners and self-employed individuals. It's already quite difficult for people in traditional employment to save for retirement, and even more difficult for the self-employed.