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.
The SIMPLE IRA (which stands for Savings Incentive Match Plan for Employees) is another retirement account for small business owners, self-employed workers, or non-traditional workers. SIMPLE IRAs have lower limits than SEP IRAs when it comes to the amount of money you can contribute. Taxes are deferred until withdrawn if the requirements are met. A 10% fine can be imposed for stopping smoking before turning 59 and a half years old.
If withdrawals are made within the first two years of participating in the SIMPLE IRA, the penalty increases to 25%. 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 might withdraw money from their businesses later in life. Most freelancers work for someone else before working on their own.
If you had a retirement plan such as a 401 (k), 403 (b) or 457 (b) with a former employer, the best way to manage accumulated savings is usually to transfer them to an accumulated IRA or a single-participant 401 (k). 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 Roth IRA is a type of retirement account that allows people to contribute after-tax money to an account. Maintaining an SEP IRA is easier than an individual 401 (k) because it involves a low administrative burden, with limited paperwork and no annual reporting to the IRS, and has equally high contribution limits.
You'll enjoy all the benefits of an IRA, including tax-deferred growth, and be able to take advantage of what many experts consider to be the best functioning retirement account: the Roth IRA. However, keep in mind that contribution limits for accounts with tax requirements, such as IRAs, are not considered separately. Like a 401 (k) plan, the SIMPLE IRA is funded by tax-deductible employer contributions and pre-tax employee contributions. Nor is a Roth IRA specifically designed for self-employed small business owners, such as SEP and SIMPLE plans.
You may also want to keep your Roth IRA at the same company that offers SEP or other types of IRAs. A Simplified Employee Pension IRA (SEP) is designed for self-employed workers and small business owners. As with other IRAs, you should open these plans with a financial institution, which has rules about what types of investments can be purchased. A SIMPLE IRA may be easier for an employer to set up than many 401 (k) plans, which have complex rules.
An SEP IRA allows a company to make employer contributions to employees, including the self-employed. 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. Both Roth and traditional individual retirement accounts (IRAs) are available to anyone with earned income, including the self-employed. IRA plans allow some early retirement exceptions (for things like some higher education expenses or health insurance premiums if you're unemployed).