A Roth IRA is an Individual Retirement Agreement that derives its name from its founder, Delaware’s late Senator William Roth. Under this plan, you have the opportunity to save money that can be put to good use when you have reached the age of retirement. Roth IRA is an interesting alternative to the traditional IRA.
Most people are curious to understand what is a Roth IRA and how is it differentiated from the traditional IRA. Here the distinguishing characteristics between the two are discussed which will hopefully shed some light on which plan will be better suited to you for your retirement needs. It is essential to make this choice of IRA carefully as it plays a big part in providing you with improved opportunities of investing a greater amount of money for your retirement.
With a Roth IRA, you input post-tax dollars into the account from which you can grow tax free up until the day you actually retire. With a traditional IRA, you put in pre-tax dollars from which you delay the taxes until retirement. For you get a better comprehension of the Roth IRA, you must first appreciate its relationship with the standard agreement. When this is completed, you will have the chance to make a more informed choice based on the facts and pertinent information that has been demonstrated. Such as all other IRAs, the Roth IRA, has its own advantages and disadvantages and therefore you must ensure that it is the correct one for you. Normally, middle income bracket persons perceive the Roth IRA to be to their advantage. Such points as this makes it important for you to understand the Roth IRA whichever way you decide.
The Roth IRA is perceived to the simplest option for a person’s retirement account as it offers you growth that is free from tax. When comparing with the traditional IRA, the Roth IRA is subject to being taxed once, while the usual investment is open to being twice taxed. A traditional IRA account aggregates contributions through tax-deductions which rely on the sum of the income that you receive, while the Roth IRA is the complete opposite. Whenever, you take out your funds from a normal IRA, you are required to pay taxes while with the Roth IRA, taking out your earnings is not subject to tax.
This is one of the primary distinguishing factors between the Roth Ira and the normal IRA.
For a quick look, we can observe that it is to your advantage to pay the tax immediately, for during that time you have the chance to make your contributions as opposed to delaying the taxes when you should be receiving your funds. There is a chance that this could be a good thing if the tax rate goes up however, it will be a drawback if the tax rate decreases. In that case, you will lose some of your funds. If this is an important consideration in your decision making process, be sure to weigh the chance of either possibility arising before you decide on the kind of IRA you will choose. There are additional positive and negative points that you have to be informed about before deciding upon an IRA.
A point to remember is that your Roth contribution cannot decrease your adjusted gross income (AGI). In the event that your income is bordering to a tax credit or subject to a deduction limit, it is not possible to adjust your income by making a Roth IRA contribution. Additionally, you only have the chance to gain from the tax benefits on the Roth IRA when you withdraw your earnings after you retire.
There are many points to think about when deciding upon the right IRA for you. You should always be careful to weigh the advantages and disadvantages between the Roth IRA and the traditional IRA, against each before making your final choice.
While a Roth IRA is often thought of as more advantageous than a traditional IRA, there are certainly instances where rolling over your retirement funds to a Roth may not make sense.
Roth IRAs have certain restrictions and limitations just like traditional IRAs including annual caps on contributions and income limitations. For high income individuals where a Roth IRA may be out of your reach, you may want to consider rolling over to a Roth from a traditional IRA. When considering the advantages of a Roth IRA, you also need to pay close attention to costs, including:
- Tax implications
- Rollover fees
- Income levels
- Distribution expectations
The traditional IRA has both advantages and disadvantages. Determining the right IRA for you and your family members is often dependent on a number of influential factors. There is no one-size fits all solution. Here are some things taken into consideration when determining whether or not you wish to start a traditional vs. a Roth IRA.
- Income level
- Age and years to retirement
- Tax considerations and tax benefits
- Distribution penalties and implications
The SEP IRA is a retirement plan that was specifically created to assist self-employed individuals and the owners of small businesses. Some of the business types we cater for include sole proprietorships, S and C corporations, partnerships and LLCs.
Limits to SEP IRA contributions
The maximum value that the SEP IRA is allowed to contribute for 2012 is $50,000 (in 2011 the limit was capped at $49,000). SEP IRA contributions are usually fully deductible in taxes and SEP IRA investment earnings are allowed to increase tax deferred. SEP IRA users who withdraw after the age of 59 ½ years will have the amount taxed as regular income. However, those who wish to withdraw prior to this age will have a 10% IRS penalty tacked on to the mandatory income tax.
A SEP IRA is often favored because it offers large limits on yearly contributions, the contribution amount is flexible and up to your own discretion, and there is a minimal amount of administration involved. SEP IRA plans are appropriate for a wide range of business types—from sole proprietorships to business owners with employees.
- The SEP IRA is most often utilized by the single business owner without employees (we elaborate on this below).
- Under particular circumstances, the SEP IRA also caters well to the needs of the business owner who is responsible for employees.
SEP IRA for the self-employed business owner without employees
The amount that you can put into the SEP IRA is based on whether your business is considered to be a corporation and you are given a W-2 as compensation or if you pay your taxes as a sole proprietorship and your reimbursement is considered to be personal income. We discuss both in greater detail below:
Business owner is given compensation as W-2 income
For business types such as S or C corporation, LLC, or an incorporated partnership who choose to pay taxes as a corporation, the owner receives compensation as a W-2 salary. In this regard, the yearly SEP IRA contribution can be between 0% to 25% of the W-2 salary given to the owner, up to the limit set out by the SEP IRA. SEP IRA are designed to be usually 100% tax deductible as a business expense.
Business owner receives compensation as personal income
For unincorporated businesses such as sole proprietorships, unincorporated partnerships, or an LLC that chooses to be taxed as a sole proprietorship, the SEP IRA yearly contributions are set out to be between 0% to 20% of your net adjusted income as a self employed individual (or business profits after net adjustment). SEP contributions are designed to be flexible and the percentage of contribution can be adjusted at any point or even skipped altogether in a financially difficult year. SEP IRA contributions in this form are also usually subject to being completely tax deductible from personal income.
Determining self employment income that is net adjusted
The way in which self employment income is calculated to be net adjusted is when businesses expenses are subtracted from gross self employment income and then taking away a further ½ of the tax for self employment. Between 0% to 20% of that amount (up to the contribution limit), can be paid as the yearly SEP IRA contribution.
As maintained before, the SEP IRA contributions in this case are also normally deemed to be 100% tax deductible from personal income and the contribution amounts are designed to be flexible to your needs. Furthermore, you are allowed to adjust your percentage contribution at any time.
The SEP IRA Calculator
To figure out how much you can contribute to the SEP IRA depends on your income. To calculate the contribution amount, use an interactive, SEP IRA calculator.
Deadline for set up and contribution of SEP IRA
Normally business owners must set up and contribute to his/her SEP by the time the tax deadline has arrived. Usually, asking for extensions prolongs the period in which the business owner has to set up and fund the SEP plan. In the case of a sole proprietor, April 15th would be the usual deadline to establish and contribute to an SEP for the previous tax year. If a sole proprietor filed for an extension, he/she will have the opportunity to set up and fund the SEP IRA by October 15th.
A self employed business owner without full time employees (not including a spouse), should also consider an Individual 401K in addition to the SEP IRA.
- A SEP IRA permits for contributions up to 20% of the amount of net self employment income or up to 25% of wages that are paid through the W-2. However, the benefit of the Individual 401K often allows a greater contribution at the same income level.
- An additional characteristic of the Individual 401K that distinguishes it from the SEP IRA is that the former allows the business owner a loan up to half the amount of the account (up to a maximum of $50,000).
SEP IRA as opposed to the Individual 401k: Which plan suits your needs as a self-employed individual better?
In our article SEP IRA vs Individual 401k, you can check out the similarities and differences between these two retirement plans and decide for yourself what suits you better after you’ve moved on to the next phase in your life.
How can we help you?
RetirementAccount.net is a leader in the field of financial management for clients who are interested in preparing for their retirement. We offer specially designed retirement plans to the freelancers, entrepreneurs, self-employed, independent contractors, and small business owners.
As a self-employed individual or small business, you can make life simpler for yourself with the Savings Investment Match Plan for Employees (SIMPLE-IRA). Our plan offers self-employed persons and businesses with less than 100 employees the chance to participate in a retirement plan that has tax benefits, funded by employer input, and flexible employee salary deferrals.
Contributions from the employer are eligible to be completely tax deductible as a business expense; as additional bonuses, business owners are also offered tax-deferred growth and pre-tax contributions.
The annual employer investment per plan is $350 or $25 per participant that is taken from the participant’s account on a yearly basis.
Any employer who is responsible for 100 or less employees who have earned over $5,000 in the previous year is eligible for this retirement plan. Members are not allowed to participate in any other employer-sponsored retirement plan.
Members are required to make a minimum of $5,000 from the employer in any two of the previous years and are expected to make $5,000 in the current year2.
Plan Sponsor: For employers, there is a mandatory 3% matching contribution or 2% non-elective contribution.
Participant: Up to 100% of yearly compensation up to $11,500 ($14,000 if 50 years or older).
Deadline for establishment
To make sure you get in the deadline for the current tax year, establish and inform your employees by October 13th.
There are no planned tax filing obligations that employers are required to do for the IRS. Employers are required to inform employees of particular updates over the course of the year.
Distributions at the minimum requirement begin at the age of 70 ½ years. For persons who wish to withdraw early, there is a 10% penalty attached to the withdrawal (25% for the first two years that the individual participates in the plan). If individual is under the age of 59 ½ years then exceptions may apply.
- Establish your SIMPLE-IRA Plan
- Set up electronic funding
- Enroll your employees
The advantages of a SIMPLE-IRA
Participants are provided with a variety of access investment choices including various types of mutual funds, bonds/treasuries, CDs, stocks, annuities, and ETFs.
Fantastic value for money
We offer affordable retirement solutions and free online planning tools that will assist you in your long term financial management.
Our team of professionals is specially trained to assist you in choosing the right plan for the next phase in your life and we will work alongside you to help keep your plans on track.
We offer you the opportunity to work one on one with one of our professionals, at no cost, so that we can find the investment strategy that would best suit your needs after you retire.
ETFs may trade at a discounted cost to the NAV but are also affected by the market fluctuations of the investments.
Although we offer you the chance to consult one to one with one of our professionals, the consultation should be considered to be primarily educational. The consultation is not tailored to your specific needs and you should not base your investment or tax-planning decisions only on this consultation.
Unlike standard IRAs, Self-Directed accounts are structured in such a way that you have more control over what happens with the funds within your account. That is, you’ll be more free to invest in things like:
- Real estate
- Tax liens
- Foreign exchange trading
- Precious metals
- Private companies
Gaining checkbook access to your personal IRA LLC means you now have an expanded ability over what you can invest in.
Take control of your retirement account funds with a checkbook IRA. Also often referred to as a real estate IRA, the checkbook IRA gives you the unique ability to invest in passive investments using your retirement funds. That includes stocks, bonds, real estate and even precious metals.
Replace Your Income
Retirement does not have to mean taking drastic reductions in your standard of living, but it does require a detail-oriented approach to risk and return. We help to get you there.
Taking control of your retirement funds for investing in anything from precious metals to real estate and property. Managing your own investments is not rocket science, it’s common sense. Find out how
Talk to an Advisor
Contact an qualified advisor to help put you on a safer and more secure path toward for retirement. It’s never too late to begin. Reach out to one of our qualified representatives today.