A Roth IRA or a Traditional IRA may allow you to save $5500 or less each year. If you’re over 50, these accounts may allow you to save $6,500 each year. They can grow tax-deferred, meaning you won’t pay taxes on your account gains each year.
Would you rather pay income tax now and have withdrawals come out tax-free in retirement? The Roth IRA allows that. You also have the ability to withdraw your contributions penalty-free prior to retirement. Earnings can generally be withdrawn tax and penalty free after age 59.5.
Would you prefer to pay income tax on your contribution amount later, rather than now? The Traditional IRA allows that. Withdrawals can be made penalty-free after age 59.5, and will be subject to tax as income. Any withdrawal prior to age 59.5 could also incur a 10% IRS penalty.
Now, a SEP works a lot like a Traditional IRA, but with one big difference - If you have a great year in your business, you can potentially save more. You can contribute as much as 25% of your income, up to an annual limit of $53,000. The SEP IRA is available to self-employed individuals and business owners for their eligible employees. Withdrawals work the same way as a Traditional IRA.
Your individual circumstances may limit or restrict the accounts that you may hold from a tax perspective. It is your responsibility to ensure that you are eligible to open a particular account or make contributions to that account, and to understand any rules or limits on tax deductibility of contributions you may make to your account. You should discuss these matters with your tax advisor.
Learn more about IRAs here: