SEP Roth IRA
It’s a common mistake people make to ask about establishing a SEP Roth IRA. Many individuals are under the impression that a retirement plan »”>SEP retirement plan can be either traditional or a Roth, and that is simply not true. SEP plans, Simplified Employee Pensions, are essentially a group of traditional individual retirement accounts, managed for the employees of a small business, and are subject to many of the same rules as a traditional IRA in regards to allowable investments and distribution regulations. The beauty of a SEP is the high contribution limit, which can be up to 25% of the employee’s annual compensation. The employer sets the percentage of contribution, and can review and adjust it annually, even opting to suspend it for a period of time. The percentage of contribution must be applied equally for all eligible employees. Contributions are made through a tax deductible salary reduction. Frequently the business will choose a mutual fund company to administer the account, which allows the employees to individually select their own investments from the family of funds offered. So while there is no SEP Roth IRA, there is the powerful SEP designed for small companies, the self-employed, and often favored by LLCs, S and C corporations, partnerships and sole proprietorships. The Roth IRA offers tax-sheltered earnings, and because the contributions are taxed on funding, those earnings and the qualified withdrawals are tax-free. If the Roth account has been established for five or more years, the owner may begin taking distribution as early as age 59 ½ with no further tax burden. If the account is a self-directed Roth, there are more opportunities for investment diversification. The investor might choose precious metals or real estate instead of the more conventional stocks, bonds, and mutual funds. An employee can participate in a company SEP account and have an additional Roth account to contribute to outside of the workplace. An investor with a Roth IRA may be self-employed and choose to establish a SEP account, contributing 20% of net profit. The contributions to the SEP plan are fully vested as soon as they are made, so those balances are portable and can be rolled into another IRA or transferred to a new employer’s sponsored plan in the event of a job change. While there is no SEP Roth IRA account available, both the SEP account and the Roth IRA are valid and solid opportunities to save and prepare for retirement.
