Traditional IRA vs. SEP

Building a retirement nest egg requires understanding your options.

Building a retirement nest egg requires understanding your options.

Making decisions on how to invest for retirement is never easy, given the number and complexity of retirement account options. The types of IRA accounts alone can be overwhelming. Fortunately, a little understanding goes a long way when it comes to these types of accounts. The differences between a traditional IRA and a SEP-IRA involve only a few key concepts.

IRA Accounts

Individual Retirement Arrangements, or IRAs, are a special type of tax-advantaged account used to save and invest for retirement. IRAs of all types are regulated by the IRS, which establishes rules regarding how IRA accounts may be used, and by whom.

Personal IRAs

A traditional IRA is a type of personal IRA. Along with the Roth IRA, personal IRA accounts are established, managed and maintained by an individual taxpayer. All benefits and responsibilities of the IRA go directly to the account owner.

Small-Business IRAs

Certain types of IRAs have been established to allow small businesses to offer retirement plans to their employers. Along with the SIMPLE-IRA, the SEP-IRA is a small-business retirement plan. These plans must be established by a business or employer. They are not available to nonbusiness entities.

Traditional IRAs vs. SEP-IRAs

Qualified taxpayers may get a tax deduction for contributions to a traditional IRA. But only the employer may contribute to a SEP-IRA account. In this case, the employer gets a business tax deduction for contributions to the employee's SEP-IRA account. These contributions do not count toward the employee's maximum IRA contribution. In other ways, the SEP-IRA is the same as a traditional IRA.

About the Author

I am a professional freelance writer and native English speaker. I am also a Certified Financial Planner (CFP) and a new father (21 month old). You can see some of my writing samples on www.arcticllama.com/samples.htm including writings for Tech Signal Training. I also write for BrightHub under the name Brian Llama and have my own personal finance site at www.financegourmet.com with an associated blog at blog.financegourmet.com

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