Simple and SEP IRAs

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Simple and SEP IRAs

Both options are very similar to the traditional IRA. There is a tax deduction for each of the contributions made to the plan, and investments are allowed to grow tax-deferred until you start making withdrawals from the plan.

SEP IRAs

SEP IRAs work much like a traditional IRA. You are allowed a deduction for any contributions you make. The primary difference is the contribution limit. For 2012, if you have a SEP, you are allowed the lesser of:

  • 25% of your net earnings from self-employment, or
  • $50,000

Once the money is contributed, you may invest it just like a regular IRA in bond, stocks, CD,  mutual funds, etc. The rules are the same for withdrawals. With a some exceptions, withdrawals made prior to age 59 1/2 are penalized.

Simple IRAs

Simple IRAs function like Traditional IRAs. The primary difference is contribution limits. If you have a Simple IRA, you can contribute (for 2012) 100% of your net earnings from self-employment up to $11,500 for people under 50, or $14,000 if you are 50 or over.

One last important difference is that if you make an early withdrawal from the plan within two years of the inception date, you are penalized more than you would if it were a SEP IRA—25% as compared to 10% penalty.

Simple IRA plans are employer plans.  They are available to employers with under 100 employees.  Employers must generally make matching contributions of 3% on a dollar for dollar basis or non-matching contributions of 2%.