A traditional IRA or a Roth IRA are best for people with relatively low self-employment incomes. SEP IRAs work best for self-employed people who don't plan to have employees in the future and who want to maximize their retirement contributions. Self-employed workers have several plan options, including defined contribution plans, such as an individual 401 (k) plan, SEP IRA, and SIMPLE IRA. But they also have some definite benefit options.
SEP-IRAs, or simplified pension IRAs for employees, offer a low administrative burden and high contribution limits. Because of those high limits, they have mostly replaced the Keogh plans, which were common before 2001, but are now called qualified plans and have largely fallen into disuse. Now that I'm established, I want to make good decisions about my finances. I have some savings, a personal IRA, some bonuses.
Traditional IRAs allow you to make tax-deductible contributions and Roth IRAs allow you to make after-tax contributions, and money grows tax-free. 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. An SEP IRA allows a company to make employer contributions to employees, including the self-employed. The SIMPLE IRA uses the rules of a traditional IRA, so it is tax-deferred and has the same retirement requirements when you retire.
And using an SEP IRA won't stop you from using a traditional or Roth IRA (which you really should do). So, you can maximize your contributions to any of the above retirement plans and still make the most of your own personal IRA. By contrast, the SEP IRA allows you to contribute at a rate of 25 percent, so you'd have to earn much more to reach the same level of contribution. The SIMPLE IRA is an easy way for small employers, including self-employed workers, to offer employees a retirement plan.
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. A SIMPLE IRA may be easier for an employer to set up than many 401 (k) plans, which have complex rules. So, unlike the SEP IRA, you can contribute more to your retirement plan at a lower income level, all else being equal. 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.
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. SIMPLE IRAs offer a low administrative burden, a higher contribution limit than traditional or Roth IRAs, and the ability to contribute more money to your own retirement account than to those of your employees.