SEP IRASEP provisions function in an essentially identical way to a regular standard IRA investment, with the distinction being that it is the employer who funds the investment. This can be a remarkably beneficial tool for the individual investor, who will have the ability to redirect their cash income into other investments like their own property, and it will enable the employer to make their jobs appear considerably more appealing. A lot more people than ever before are worried about not having sufficient money for their retirement, so if you are able to fix this problem you will be really well thought of.

SEP IRA vs Standard IRA

Despite the fact that this is a different kind of IRA from the standard edition which everybody is familiar with, it continues to have the same funding constraints. Even a company with a high earning employee will still only have the ability to invest up to the very same limit as those earning more moderate salaries. The government needs to impose these limits so as to protect the planned benefit to them of developing the system. The plan is to permit a lot more people to save for their own retirement, reducing the burden on the state pension assets. If the investment is retained over a long period, it will still build up into a healthy retirement package.

The guidelines of the employer based package are practically identical to those for the standard IRA, both with regards to how the money may be invested, and when and how it can be withdrawn. The majority of the employer contributions are invested in mutual funds, as they offer a comparatively secure and varied method of investing in stocks. It is feasible to invest specifically in stocks, whether or not it is the stock options of the employer or some other stock which you consider signifies a sensible investment. It is also possible to invest in real estate, but it will naturally take quite a while for sufficient funds to accumulate to make this useful.

A SEP IRA is intended to be an efficient way to make investments for retirement, and therefore it has to have significant limitations on withdrawals from the account. There are charges placed on withdrawals from any IRA, regardless of whether they are set up by the individual or the employer. Some concessions are made in both cases to individuals who have critical and extremely essential expenses, normally associated with close family members. Medical expenses can be taken care of up to a specific percentage, and also, it is possible to cover education or a first house.

The funds which are put into the IRA must originate from the employer, and must not come from any other source like personal contributions or borrowings. This is prohibitive, but it is normally no problem to the individual as they simply set up a different IRA which allows these funding strategies. A regular conventional IRA is funded by the individual, up to a specified limit every year. You are able to put borrowed funds into that kind of IRA, provided that they are not guaranteed by the account holder.

Benefits of SEP IRA

Creating a SEP IRA for employees is one thing that every employer should be giving consideration. The government would like to see people providing for their own retirement, and people themselves are incredibly worried about the standard of living they will be in a position to have after they have completed working. If you are aiming to employ the best quality of worker you can, providing this kind of incentive is one of the ways to appeal to them. The very best workers have a tendency to be those who are worried about the future of their families, and those who are looking for an investment like a SEP IRA .

Backdoor Roth IRA

A Backdoor  is simply an indirect technique to make a contribution to a Roth IRA in the event that you are non-eligible for a direct contribution due to your high income.

There are no restrictions on income when you are contributing to a non-deductible traditional IRA. Limits are also not imposed when converting a traditional IRA to a Roth IRA.

Backdoor Roth IRA

In case your income is deemed “too high” for contributing to a Roth IRA, consider a Backdoor Roth IRA. The phaseout of the modified adjusted growth income (AGI) in 2015 begins at $116,000 and $183,000 for single and married filing jointly respectively. For married filing separately, it is $0.

In case your income exceeds the above thresholds, you cannot take advantage of a Backdoor Roth. Instead, consider a deductible contribution to a traditional IRA. The latter is possible only if you are eligible for one or you can directly contribute to a Roth IRA.

Rationale for adopting the Backdoor IRA path

If you have money stashed away in taxable accounts, there is a requirement to pay the applicable on dividends and interest. When the assets are eventually sold, there is also the need to pay taxes imposed on capital gains. You do not have to pay such taxes if you put your money into a Backdoor Roth IRA.

Empirical view

When you contribute to a Backdoor Roth IRA, you are simply making a nondeductible contribution to a traditional IRA prior to making a Roth conversion. The pre-existing IRA funds (non-Roth), however, in the traditional, SIMPLE and SEP will in all possibility be the pre-tax earnings and their deductible contributions. In case you are making a Roth conversion, it will not be possible for you to limit the conversion to just the nondeductible contribution.

When you file your income taxes, any money converted by you will represent all money present in traditional, SIMPLE IRA and SEP accounts, independent of the account Roth conversion money is sourced from.

To give an example: if the nondeductible contributions made by you comes to only 25 percent of the total money stashed in your SEP, SIMPLE SIRA and traditional accounts, then the tax free amount will be limited to 25 percent of the Roth conversion amount. For the remaining 75 percent, the Roth conversion sum will represent pre-tax or deductible money across all the traditional, SIMPLE and SEP IRAs.

As a result, the tax owed by you (at the present rate of income tax) will come to 75 percent of the Roth conversion amount. If it is possible for you to transfer to a employer sponsored 401(k), solo 401(k) or the 403b, then there will be no taxation imposed on them during the Roth conversion process.

Cautionary terms

In case you possess any other IRAs, you should know that the taxable part of any conversion made by you is then prorated over all the IRAs. It will not be possible for you to exclusively convert the non-deductible amount. If you wish to benefit from Backdoor Roth IRAs, there is a need to convert any other IRA(s) you hold as well.

What is an IRA?

ira painted egg

To retire comfortably, you may need to save up to 85 percent of your pre-retirement income. Just a 401(k) may not help you accumulate significant savings and when you account for inflation, your purchasing power may drop as you settle into retirement. That’s why so many Americans are IRA account holders. If you want to know what is an IRA, read on.

An individual retirement plan

As its name implies an Individual Retirement Account is an account that you open on your own as a retirement planning solution. It is different from a 401(k) provided by your employer, where they can contribute or match your contributions. You can open an IRA at a bank, brokerage firm, mutual fund company or automated investment service. IRA providers are licensed custodians of your money, offering you a variety of investment options and imposing tax penalties on early withdrawal of retirement funds for non-allowable purposes.

How much you can contribute towards each plan also differs. For instance, the basic contribution limit for a traditional IRA is $5,500, which increases to $17,500 for a 401(k). If you’re aged 50 years or above, you’re entitled to an extra catch-up contribution of $1,000 in your IRA and a corresponding $5,500 for your 401(k).

Why open an IRA?

Now that you have an idea about what is an IRA, let’s look at why you should consider opening one.

To accumulate a significant retirement income. Funding commitments and priorities at different stages of your life – from getting married and buying a home to child birth, vacations and college expenses – will inevitably cost a small fortune. If you contribute $5,500 a year in your IRA for 30 years at a return of 5%, you would have approximately $385,000 in retirement income.

To save taxes. You can deduct your IRA contributions from your taxable earnings. Note : You are entitled to a full, partial or no deduction if you also have an employer-sponsored retirement plan.

Types of IRAs

There are a total of 11 types of IRAs, but the four popular ones are:

Traditional IRA: A regular set-up where you make contributions for tax-deferred growth and deductions on income tax returns. Tax deferrals help retirees – whose tax bracket is lower than when they were in their jobs – by taxing their money at a lower rate. It is available to anyone under the age of 70 ½ years drawing an income from a job. Withdrawals begin and are taxed when the account holder turns 70 ½ years of age.

Roth IRA: Here, you make contributions from your after-tax income for tax-free growth and tax-free withdrawals post retirement. Withdrawals are allowed only after you turn 59 ½ years of age or a penalty must be paid.

Rollover IRA: Here, you transfer funds from a retirement account from a qualified retirement plan such as a 401(k). If you have changed jobs or retired and have assets in your employer-sponsored retirement plan, you can roll over to a traditional or Roth IRA via a direct transfer or a check.

SEP-IRA: This is a traditional IRA that an employer sets up for employees. Contributions made by the employee cannot exceed the lesser of :

25 percent of employee compensation OR

$53,000 (2015 figure)

A thorough understanding of what is an IRA and the different types of IRAs can help you choose one that saves you more tax and increases your retirement savings.