Differences in SEP IRAs, Roth and Traditional

You've probably heard many different terms for IRAs. Some of them are simply referring to any personal retirement account but others refer to specific types of accounts such as SEP IRAs, Roth IRAs or traditional IRAs. Each one is similar in that its origin came from a specified tax code, and they all are vehicles to save for retirement. Each has differences, and knowing the differences gives you the opportunity to maximize the benefits.


SEP is an acronym for Simplified Employee Pension. The employer sets up the plan. In 2010, the employer had to include every employee in the SEP who was 21 or over, worked for the employer at least three out of the last five years and made at least $550 in the last year. The employer makes all SEP contributions. Some companies that sell the plans allow individuals to make their IRA contributions into the same account as the SEP. For the year 2010, the employer could contribute 25 percent of your salary up to $49,000. If you withdraw the funds before you're 59 1/2, you pay a 10 percent penalty and taxes.

Traditional IRA

The individual makes all the contributions to a traditional IRA. In 2010, each person with earned income that has no other retirement plan has the right to contribute up to $5000 if the person is younger than 50 years old, or $6,000 if 50 or older. However, if you have another type of retirement plan such as a SEP or 401(k), you have income restrictions. For single people, you can't make more than $55,000 and still make a full contribution, or over $65,000 for a partial contribution in 2010. Married filing jointly have a salary limit of $89,000 if they have another retirement plan, with the allowable contribution phasing out at $109,000. If only one spouse has a plan, the salary limit increases to $166,000, phasing out at $177,000. You deduct from your taxes the amount you put into a traditional IRA but pay taxes on the entire amount when you remove it. You must start taking payment by age 70 1/2 or pay an excise tax. You pay a 10 percent penalty and taxes on withdrawal of any funds if you're under 59 1/2.

Roth IRA

You don't get the tax deduction with a Roth. You put in after-tax dollars, but you get a benefit when you take out the funds. You pay no taxes on the growth, making this ideal for young people who have a longer time for funds to grow. The contribution limits are the same as the traditional IRA, $5,000 if under 50 or $6,000 for those 50 or older. If you have a retirement plan at work, the income limits for contributions start to decrease at salary levels of $105,000 and disappear at $120,000. For married filing jointly, the salary limit amount is $166,000 with a contribution completely disallowed at $176,000. Married people filing separately can't contribute more than $10,000 to the IRA.

Saver's Credit

For 2010, if you contribute to an IRA, both Roth and traditional or a work plan such as 401(k), 403(b) or SIMPLE IRA you might get as much as $1,000 tax credit. The amount is 50 percent of your first $2,000 and is only available for singles earning $26,500 or less, married filing jointly earning $53,000 or less or head of the household earning $37,500 or less. Since the SEP contribution comes from the employer, contributions to the SEP aren't eligible for the credit.

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