SEP IRA vs. Traditional IRA. Part of the series: Finance & Investment Tips. The main difference between a SEP IRA and a traditional IRA is a Self Employed Pension is designed as a financial retirement plan for those who one their own business, while traditional IRA’s are designed for company employees. Understand how both retirement plans work for each sector of business with tips from a registered financial consultant in this free video on finance and investment….(read more)

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When it comes to saving for retirement, there are several options available to individuals, including SEP IRAs and Traditional IRAs. Both of these accounts offer tax advantages and can help individuals build a nest egg for their golden years. However, there are key differences between the two that individuals should consider when choosing which account is right for them.

A Simplified Employee Pension Individual retirement account (SEP IRA) is a retirement account specifically designed for self-employed individuals and small business owners. With a SEP IRA, employers can make tax-deductible contributions to their own account and the accounts of their employees. Contributions to a SEP IRA are made on a pre-tax basis, which means that they are tax-deductible in the year they are made. This can help individuals lower their taxable income and save on their tax bill.

On the other hand, a Traditional IRA is a retirement account that is available to anyone who has earned income. With a Traditional IRA, individuals can make tax-deductible contributions up to a certain limit each year. Like a SEP IRA, contributions to a Traditional IRA are made on a pre-tax basis, allowing individuals to lower their taxable income and reduce their tax bill.

One of the key differences between a SEP IRA and a Traditional IRA is the contribution limits. With a SEP IRA, the contribution limit is much higher than with a Traditional IRA. In 2021, the contribution limit for a SEP IRA is up to 25% of an individual’s net self-employment income, up to a maximum of $58,000. In comparison, the contribution limit for a Traditional IRA is $6,000 for individuals under the age of 50 and $7,000 for individuals 50 and older.

Another difference between a SEP IRA and a Traditional IRA is how they are funded. With a SEP IRA, contributions are made by the employer, while with a Traditional IRA, contributions are typically made by the individual account holder. This can make a SEP IRA a more attractive option for self-employed individuals and business owners who want to save more for retirement and take advantage of tax-deductible contributions.

Ultimately, the choice between a SEP IRA and a Traditional IRA will depend on an individual’s specific financial situation and retirement goals. Both accounts offer tax advantages and can help individuals build a nest egg for their future. It is important to consult with a financial advisor to determine which account is the best fit for your needs and to ensure that you are making the most of your retirement savings.