SEP IRA vs. Roth IRA

[msmerymac]

Is either one markedly better? Can I contribute to both? I know I'll be able to contribute more in general to a SEP IRA, since the Roth maxes out at $5500, which is less than 25% of my income, but otherwise, when you are self employed (so technically there's no pre-tax or post-tax contributions), there's really no difference, right? SEP IRAs grow tax-free and have tax-free withdrawals like Roth IRAs? And it appears the funds are the same or similar, at least with Vanguard.

Let's assume I'm not over the income threshold for the Roth IRA (I'm not worried about that this year - I file married, jointly).  

[cjeanette]

SEP IRAs are more like Traditional IRAs with their rules with a higher contribution limit.

[msmerymac]

Aug 21, 2014 10:32:21 GMT -5 cjeanette said:

SEP IRAs are more like Traditional IRAs with their rules with a higher contribution limit.

Meaning the withdrawals are not tax-deductible?

[barefootcontessa]

Aug 21, 2014 10:42:44 GMT -5 msmerymac said:

Aug 21, 2014 10:32:21 GMT -5 cjeanette said:

SEP IRAs are more like Traditional IRAs with their rules with a higher contribution limit.

Meaning the withdrawals are not tax-deductible?

yes, tax benefit comes on the front end.  plus 10% penalty if taken before 59 1/2.

[msmerymac]

Good to know! I will prioritize the Roth, then.

[mokes]

Yes, you can contribute to both. I'm not sure what you mean by saying there's no pre-tax contributions for self-employed people. SEP contributions are pre-tax; the money is taxed upon withdrawal. Roth contributions are taxed now; withdrawals are tax-free.

 

[msmerymac]

Aug 21, 2014 11:11:50 GMT -5 mokes said:

Yes, you can contribute to both. I'm not sure what you mean by saying there's no pre-tax contributions for self-employed people. SEP contributions are pre-tax; the money is taxed upon withdrawal. Roth contributions are taxed now; withdrawals are tax-free.

 

Just since I don't technically have a paycheck that taxes and contributions come out of, but you're right that SEP IRAs decrease my AGI, I believe, so technically pre-tax. 

[SJ]

You can do both and I would if you qualify for both.

The SEP is a great tool if you are self-employed. Higher contribution limit, current tax deduction. It is more like the Traditional IRA in that you are taxed on the mandatory withdrawals down the road.

Roth eligibility phases out at higher income levels. There is no current tax break but withdrawals are not taxed and are never mandatory.

Both grow in a tax-deferred way- no taxes to pay on interest, dividends, or capital gains.