Aside from contribution limits and taxation, there are a few other SEP IRA rules you should know.
An employer may be able to exclude an employee from SEP IRA contributions if they're younger than 21 years old or haven't worked for the company in any capacity in three of the last five years. If an employee meets those criteria, though, the employer is required to make contributions to their account.
Like most retirement accounts, early withdrawals taken before age 59 1/2 from a SEP IRA are subject to a 10% penalty. Additionally, SEP IRAs funded with pre-tax money are subject to required minimum distributions starting at age 73.
The SEP IRA is a simple retirement plan for small businesses. A better option for individual business owners with no employees may be a Solo 401(k). There are several advantages to a Solo 401(k) vs a SEP IRA.
What is a Roth IRA?
A Roth IRA is a retirement savings account available to most individuals with earned income. The big difference between a Roth IRA and a traditional IRA is how they're taxed. Unlike a traditional IRA or SEP IRA, contributions to a Roth IRA are not exempt from income tax.
Individuals still pay taxes on any amount they put into a Roth IRA, but their investments inside the account still grow without incurring any taxes. In exchange for paying taxes on contributions, Roth IRA withdrawals are completely tax-free.
An additional benefit of a Roth IRA is that you can withdraw contributions at any point in time without paying any penalties. Even if you haven't reached the age of 59 1/2, as is required for other retirement accounts, you can take out any amount you contributed directly to the Roth IRA at any time. You can take a penalty-free withdrawal of any amount converted from a traditional IRA, SEP IRA, 401(k), or other retirement account to a Roth IRA five years after the conversion. This advantage makes it an extremely flexible retirement savings account.
