What Is The Difference Between An IRA And An SEP?
What are the Differences between an IRA and a SEP? The difference between an IRA and a SEP seems daunting but it doesn’t have to be. Both accounts are retirement vehicles, with tax deferred savings, but which one you enroll in makes a big difference in the long term. Here is an in-depth look at both the IRA and the SEP.
The IRA, or the Individual Retirement Account can be established by anyone employed earning taxable income. The main difference between an IRA and a SEP remains that you can open an IRA individually, but the employer opens a SEP. The IRA allows maximum annual contributions up to $5,000 if you are under 50 and up to $6,000 a year if you are over 50. The funds grow tax-deferred until contributions are withdrawn. Once you reach age 59 ½, you can start your withdrawals and are taxed at your current tax rate. Funds withdrawn before 59 ½ suffer a 10% tax penalty and will be considered ordinary income which will result in another tax. The withdrawn funds may even raise your tax income bracket, so never pull out money from this account until you’re eligible.
A SEP, or Simplified Employee Pension is established strictly by the employer. Here the employer decides the annual contribution paid to these accounts. This is the key difference between an IRA and a SEP. With a SEP, the contributions range from 0% to 25% of an employee’s net salary up to a maximum of $45,000 per year. As you can see, this is another huge difference between the IRA and the SEP. If you are lucky enough to work for a generous company, you may have quite a sum at retirement. Self- employed individuals with no employees can also set up the SEP account. The employer also receives a tax deduction for this contribution and may elect not to participate in subsequent years. If the employer enrolls, however, the annual contribution percentages must be identical for all enrolled in the plan. According to the IRS, the employee must have worked for the organization for at least three of the last five years, be at least 21 years old, and received at least $550 in compensation for the year.
As you can see the differences between the IRA and the SEP are significant. No matter which plan you enroll in, the important thing is to start. Regular contributions for retirement savings whether in an IRA or a SEP will lead to peace of mind and a comfortable retirement.