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SEP IRA or Traditional IRA: Which Plan Is Right For You?

By    |   Tuesday, 26 May 2015 12:42 PM

The Simplified Pension Plan (SEP) IRA and the traditional IRA seem similar at first glance, but have different features that suit certain lifestyles and careers better than others.

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A traditional IRA is a long-term retirement plan that allows individuals to make tax-deductible contributions to a savings account throughout the course of their working life. An SEP IRA is a type of traditional IRA that allows business owners to contribute to both their own and their employees’ savings accounts.

Traditional IRA
Because the traditional IRA is the simplest type of IRA, it is subject to the fewest eligibility requirements. Any person who is employed and earning income, and is under the age of 70½ can set-up a traditional IRA plan.

Traditional IRAs are efficient for individuals to create if their employer does not offer an SEP IRA or other workplace retirement plan. The owner of a traditional IRA is expected to make regular contributions to their account. These contributions are either wholly or partially tax deductible and are not taxed until they are distributed during retirement.

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SEP IRA
SEP IRA accounts entail the same basic requirements as traditional IRA accounts but are set-up by business owners instead of individual employees. In order for an employer to create an SEP IRA plan for an employee, the employee must be over the age of 21, worked for the employer for at least 3 years, and earned at least $600 from the employer in the previous year.

SEP IRA accounts are practical for owners of businesses of any sizes. An employer who chooses to create SEP IRA plans for themselves and for their employees is the sole contributor to the plans. Typically, contributions to employees’ plans come from regular predetermined amounts from their salaries.

When a business owner initially chooses to set-up an SEP IRA plan, they are subject to the 3-of-5 rule. The 3-of-5 rule requires employers to include all employees who have worked for them for 3 of the prior 5 years to be included in the SEP IRA plan. The 3-of-5 rule is the most restrictive plan requirement, but after establishing an SEP IRA plan, an employer can make the plan less restrictive.

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The Simplified Pension Plan (SEP) IRA and the traditional IRA seem similar at first glance, but have different features that suit certain lifestyles and careers better than others.
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2015-42-26
Tuesday, 26 May 2015 12:42 PM
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