What is an IRA? - Roth, Traditional and SEP | U.S. Bank | U.S. Bancorp Investments (2024)

FAQs

What's the difference between a Roth IRA and a SEP-IRA? ›

Both a SEP IRA and Roth IRA offer tax benefits when you retire. The main difference between a SEP and Roth IRA is that SEP IRAs offer tax-deferred growth on your investments, while Roth IRAs give you tax-free growth and withdrawals in retirement. Contributions to SEP IRAs are tax deductible.

Similar to other types of retirement accounts, there are limits on what you can contribute each year. Types of IRAs include traditional IRAs, Roth IRAs, SEP IRAs and Simple IRAs.

A Roth individual retirement account (IRA) is funded with after-tax dollars and earnings and withdrawals aren't taxed. This structure can benefit younger investors who may be in a lower tax bracket now than at retirement.

If you're self-employed, a SEP IRA can allow you to save more than a traditional IRA, but be mindful that you have to contribute to an account for each employee as well. A traditional IRA may be a good option if you want to save more but aren't self-employed and can't open your own SEP IRA.

A SEP IRA is essentially a traditional IRA for people who run their own businesses and can afford to save more for retirement than other IRAs allow. It's simple to administer and offers a double tax benefit: Tax-deductible contributions mean lower taxable income now and taxes on gains are deferred until retirement.

The eligibility requirements under the SEP are: an employee must perform service in at least three of the immediately preceding five years, reach age 21 and earn the minimum amount of compensation during the current year.

SEP IRA requirements

Whether your business is a sole proprietorship, partnership, or corporation, you are permitted to establish a SEP IRA. If you are not a business owner or a self-employed person earning contract-based income, then you can't independently establish a SEP IRA or make contributions to one.

A traditional IRA is an individual retirement account (IRA) designed to help people save for retirement, with taxes deferred on any potential investment growth. Contributions are generally made with after-tax money, but may be tax-deductible if you meet income eligibility. ¹.

In 2024, the Roth IRA contribution limit is $7,000, or $8,000 if you're 50-plus. The Roth IRA income limits are less than $161,000 for single tax filers and less than $240,000 for those married filing jointly. These numbers are adjusted annually for inflation.

If you're unsure which type of IRA you have, you'll want to check the paperwork you received when you first opened the account. It will explicitly state what type of account it is.

What's better, a Roth IRA or a traditional IRA? ›

To come out even in terms of after-tax savings, you have to be disciplined enough to invest the traditional IRA tax savings you get every year back into your retirement savings. If that seems unlikely to happen, then you'd be better off saving in a Roth, where you'll arrive at retirement with more after-tax savings.

You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

A SIMPLE IRA allows both the employee and the small business owner or sole proprietor to make contributions. A SEP-IRA, meanwhile, only allows business owners to make contributions for both themselves and their employees.

What's more, Roth IRAs offer more flexible early withdrawal rules. The big downside is contribution limits are significantly lower than a SEP IRA. If you want to maximize your retirement savings, a SEP IRA is a better option.

A SEP-IRA is a traditional IRA that holds contributions made by an employer under a SEP plan. You can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA.

Yes, you can contribute to a traditional and/or Roth IRA even if you participate in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA plan).

If you max out your SEP IRA, you can reduce your taxable income for the year by $61,000 for 2022 and $66,000 for 2023. A SEP IRA does not have a Roth option. You can only contribute to the plan with pre-tax dollars, the same way you would contribute in pre-tax dollars to a traditional IRA or a 401k.

Converting a SEP IRA to a Roth IRA can be a sound retirement planning strategy if you can afford to pay the taxes now. This is especially true if you expect to be in a higher tax bracket after you retire.