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.
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.
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.
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.