Table of Contents
What is a SEP IRA?
What is a Roth IRA?
SEP vs. Roth IRA: what are the main differences?
Benefits and limitations of SEP IRAs
Alternative to SEP IRAs for self-employed people
Benefits and limitations of Roth IRAs
Alternatives to Roth IRAs for any saver
How to open an SEP IRA
How to open a Roth IRA
Can one open both a Roth IRA and a SEP IRA?
The bottom line
Sep 12, 2022
9 min read
Two beneficial retirement savings accounts include the SEP-IRA and the Roth IRA, both of which utilize individual retirement accounts (IRA) to save for the future.
There are many benefits that come with being self-employed, but one of the potential downsides is that employees will need to figure out their own retirement savings strategy. By forgoing traditional employment—which might come with a retirement plan, such as a 401(k) or 403(b), and even matching employer contributions—self-employed individuals must independently research, open, and fund the retirement savings account that works best for them.
Two possible retirement account options include a SEP IRA and a Roth IRA, both of which offer tax advantages to eligible future retirees. But which is better for self-employed individuals, a SEP IRA or a Roth IRA? Here’s a look at how they compare.
A Simplified Employee Pension (SEP) plan is a retirement option available to employers of any size—even self-employed individuals. These plans allow small business owners to set up and contribute to a traditional IRA (individual retirement account) for each employee in their company, without the typical startup costs and maintenance expenses involved with more complex plans, such as a 401(k).
If an employer decides to offer a SEP plan to even a single employee (including themselves), they must offer it to all eligible employees. Each employee is given their own SEP IRA account, where the company makes contributions on their behalf. Employees own those funds entirely from the very beginning, as well—employers are not allowed to require that the funds vest over time.
Employers must contribute an equal amount by percentage to every eligible employee’s plan, up to a maximum of 25% of each person’s employment income or $61,000 annually (for 2022), whichever is less. Unlike with traditional IRAs, however, employees age 50 or older cannot make catch-up contributions into their SEP IRA plan. Employers may adjust the percentage contributed each year.
A Roth IRA is another type of individual retirement account, aimed at individuals who meet certain income limits. These savings vehicles enable employees to contribute after-tax dollars to an account where they grow tax-free until retirement. When the time comes to withdraw funds (as soon as age 59 ½), both the original contributions and any growth over the years can be withdrawn without taxes or penalties.
In 2022, eligible individuals can contribute up to $6,000 into their Roth IRA account. If they are age 50 or older, an additional $1,000 catch-up contribution is allowed.
Roth IRAs are not tied to an employer. Eligibility to contribute—and the maximum allowed—is determined by the individual’s income.
, individuals who want to contribute to a Roth IRA must earn less than:
Individuals who earn below this limit are eligible to contribute, but may not be able to contribute the maximum, as phase-out limits also apply.
A Roth IRA can be opened with any number of different financial institutions, including banks, credit unions, and brokerages. When it comes to selecting a Roth IRA, self-employed individuals can select the account, institution, and specific investment options that suit them best.
FYI: Try Titan’s free Roth IRA Calculator to project how much your Roth IRA will give you in retirement.
There are some very important differences to note when it comes to choosing a SEP IRA vs a Roth IRA for self-employed retirement planning.
For starters, SEP IRAs allow for much larger annual contributions than Roth IRAs. In fact, depending on income, one could set aside 10 times as much in a SEP IRA each year, compared to a Roth. Of course, if there are other employees involved in the company, they would be required to get the same percentage of SEP IRA contributions compared to their earnings.
The accounts also offer different tax advantages: SEP IRA contributions are tax-deductible to the business each year, but withdrawals are taxed as ordinary income in retirement. Roth IRA contributions are made with after-tax dollars today, but continue to grow tax-free and are withdrawn without additional taxes in retirement.
Try Titan’s free Roth IRA Calculator to see how much your Roth IRA will give you in retirement.Learn More
SEP IRAs allow small business owners to reduce their taxable income. “Self-employed people have to pay self-employment tax on their income,” explains Titan retirement specialist Eddie Lopez. “That’s why lowering your ordinary income with SEP IRA contributions can be attractive.”
But SEP plans come with limitations—especially for business owners who have employees.
Self-employed individuals also have the option of a 401(k)-style retirement savings account, in the form of a Solo 401(k). These one-participant retirement accounts are available to individual business owners (and their spouses), and allow self-employed individuals to make contributions both as an employer and an employee, up to an annual maximum of $61,000 in 2022 ($67,500 for those age 50 and older).
Roth IRAs allow eligible individuals to save for retirement with post-tax contributions today, but which grows tax-free until retirement. “Once you turn 59½,” explains Lopez, “The IRS can touch a dime.”
But not everyone can contribute to a Roth; eligibility is based on income.
One alternative to the Roth IRA that is available to nearly all individuals is a traditional IRA. These retirement savings accounts have the same contribution limits as a Roth, but offer tax deductions in the year that contributions are made. For business owners, saving into a traditional IRA is free of the requirement to offer equal contributions for any other eligible employees.
Self-employed business owners interested in opening a SEP IRA will first need to select the financial institution that will hold the IRA accounts for each employee (even if it’s just one). If additional employees will be involved, an agreement outlining the terms of the SEP-IRA offering should be provided to each employee.
Each employee will receive his or her own SEP IRA account, which the company will fund at its discretion. Employees are responsible for how that money will be invested; however, they are 100% vested in any contributed funds right away.
A Roth IRA can be opened at any number of financial institutions, such as banks, credit unions, and even investment brokerages. As long as the self-employed individual qualifies for a Roth (based on their income) a new account can be opened and funded with an after-tax contributions.
Once the right financial institution is selected, it’s a matter of completing the process to open a new account. This usually means providing proof of identity, proof of employment, and information on the bank that will be used to fund the account.
The account owner can then choose how they want to invest their Roth IRA funds, either by selecting individual investments, opting for a target-date fund, or curating a portfolio allocation based on personalized goals.
Self-employed business owners can have both a Roth IRA and a SEP IRA as part of their overall retirement savings plan, as long as their income falls within the permitted threshold for a Roth.
The business owner’s company would fund the SEP IRA, whereas the business owner would fund the Roth personally. For this reason, the contributions made to a SEP IRA will not affect the maximum contributions that are allowed to be made into a Roth IRA. Conversely, if a business owner has both a Roth and a traditional IRA, their limit for the year includes contributions into both accounts.
Saving for retirement can involve a multi-faceted approach, particularly for small business owners and self-employed individuals. Two beneficial retirement savings accounts include the SEP-IRA and the Roth IRA, both of which utilize individual retirement accounts (IRA) to save for the future. Each offers its own limits, requirements, and benefits, so choosing the right one is a very personalized decision.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
IRA Withdrawal for Education: What to Know
Using money from retirement is essentially borrowing from the future to pay for expenses now. An IRA withdrawal for education must abide by several rules.
Can an IRA Be Placed Into a Trust?
Passing an IRA on to beneficiaries after one’s death can be an involved process. Using a trust can be one way to control who and when will benefit from those funds.
What a Partial Rollover Is & How to Do One
Partial 401(k) rollovers can be an option for those who aren’t content with their 401(k) investment options or who need to bridge the retirement gap between ages 55 and 59.
What Is a Simplified Employee Pension (SEP) IRA?
A SEP IRA is a type of tax-advantaged retirement account that is available to self-employed people or small business owners and their employees.
© Copyright 2023 Titan Global Capital Management USA LLC. All Rights Reserved.
Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.
Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.
The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.
Cryptocurrency advisory services are provided by Titan. Cryptocurrency trading is provided by Bakkt Crypto Solutions LLC ("Bakkt Crypto"). Bakkt Crypto is not a registered broker-dealer or a member of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Bakkt Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency execution services are provided by Bakkt Crypto (NMLS ID 1828849) through a software licensing agreement between Bakkt Crypto and Titan. Please ensure that you fully understand the risks involved before trading: bakkt.com/disclosures.
Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
Contact Titan at email@example.com. 508 LaGuardia Place NY, NY 10012.