A couple discussing a SEP IRA vs. Roth IRA
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SEP IRA vs. Roth IRA: Which Retirement Account Is Right for You?

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Feb. 27 2023, Published 5:06 p.m. ET

Individual retirement accounts, or IRAs, are a form of saving for retirement when being mindful of how to set up accounts that propagate tax-free financial growth.

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While these saving accounts may not always be tax deductible, it's possible that there are advantages against facing taxation when storing away money for the future. While working folk may have an IRA in place, what's the difference between a SEP IRA vs. a Roth IRA? Keep reading for all the details!

What is the difference between a SEP IRA vs. a Roth IRA?

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Looking at a SEP IRA vs. a Roth IRA may feel like a daunting part of setting up a retirement fund, but their differences offer a clear picture of how retirement accounts will start to build cash saved for post-employment life. Regardless of the type of IRA that those saving for retirement may opt for, there's one similarity. Both SEP IRAs and Roth IRAs require that some sort of contribution is made into the account. Also, both are eligible for tax-free rollovers when switching retirement plans.

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What is a Roth IRA?

Roth IRAs accept investments of after-tax dollars. Income taxes are paid on money being put into Roth IRA funds. These taxes dissipate once the account holder is 59-and-a-half years old and their account has been open for five years. Roth IRAs don't require a minimum age for accounts to be opened. Also, there isn't a minimum contribution required, while it's possible that Roth IRA account holders may hit a maximum. Roth IRAs grow due to compounding interest and contributions over time.

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What is a SEP IRA?

SEP IRAs are a wiser choice for self-employed people or those who identify as small business owners. SEP IRAs are similar to 401(k) saving accounts when looking ahead toward retirement. Only employer contributions can be made in employee SEP IRAs, and all investments are pre-taxed. Once the account holder is 59-and-a-half years old, income taxes are paid on qualified account withdraws. Contributors must be 21 years old, have been employed for at least three years, and have made at least $650.

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Can I have both a SEP IRA and a Roth IRA?

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After breaking down the major defining factors of a SEP IRA vs. a Roth IRA, is it possible that a retiree can plan in advance by opening both types of accounts? Yes, you can have both a SEP IRA and a Roth IRA. Employers are still able to contribute payments into SEP IRAs while payments are being made into Roth IRA plans, and employer contributions don't limit personal additions to other accounts. SEP IRAs are considered to be "traditional" retirement funds, so Roth IRAs aren't impacted.

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How to decide between a Roth IRA and SEP IRA

Deciding between a Roth IRA and a SEP IRA can be a complex decision that depends on a number of factors. Some of the key considerations include your current income, expected income in retirement, and tax bracket. Roth IRAs are typically better for individuals who expect to be in a higher tax bracket in retirement, as contributions are made with after-tax dollars, and withdrawals are tax-free.

SEP IRAs, on the other hand, are more suitable for self-employed individuals and small business owners who want to contribute a higher percentage of their income to their retirement accounts. It's important to consider the tax implications, contribution limits, and investment options associated with each type of IRA before making a decision.

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What are the tax implications of a Roth IRA and SEP IRA?

The tax implications of a Roth IRA and a SEP IRA differ significantly. Roth IRA contributions are made with after-tax dollars, which means that withdrawals in retirement are tax-free. Additionally, there are no required minimum distributions (RMDs) with a Roth IRA, allowing for more flexibility in retirement planning. In contrast, SEP IRA contributions are tax-deductible, which reduces taxable income in the year the contribution is made.

However, withdrawals in retirement are taxed as ordinary income, and RMDs are required after age 72. The tax implications of each type of IRA should be carefully considered, as they can significantly impact your retirement savings and overall financial planning strategy. It's important to consult with a financial advisor or tax professional to determine which type of IRA is most appropriate for your individual needs and circumstances.

Account holders are eligible to open both SEP IRAs and Roth IRAs as long as they're able to meet the requirements. Those who are able to make payments into both forms of accounts aren't barred from establishing them at the same time. There are no penalties or policies against funding retirements through multiple means. While it's possible to open both, SEP IRAs and Roth IRAs aren't interchangeable with one another.

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