SEP IRA

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identical to those for the standard IRA, both with regards to how the money may be invested, and when and how it can be withdrawn.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 .

What are the Traditional IRA Contribution Limits?

ira contribution limitsUnfortunately for many taxpayers, 2015 will not herald any rise in the traditional contribution limits. The limit is still restricted to $5,500, the same as the traditional IRA contribution limits in 2014.

To many observers, this statistic came as a kind of surprise as the maximum contribution limit for a 401(k) was increased in 2015. It has to be remembered that contribution limits are applicable to traditional and also to IRAs. It is to be noted that you can have both these kinds of accounts, but the maximum contribution per year is a combination of both.

The maximum contribution limits are adjusted by the IRS as per changes in the CPI or Consumer Price Index. It was determined that the yearly rise in CPI was quite low to justify any changes to the maximum.

IRA contribution limits from a historical perspective

2013 was the last year when the traditional IRA contribution limits were increased. This is not surprising as inflation was very low during the period. When the limits are increased by the IRS, it is generally done in increments of $500. When talking about a maximum of $5,500, an increase of $500 comes to approximately 10 percent.

Maximum applicable IRA catch up contribution for 2015

For individuals aged 50 and above, the IRA catch up contribution for 2015 will remain the same, at an extra $1,000. As $5,500 is standard contribution, it means that the total contribution comes to $6,500- adding standard and match up contributions. You can be deemed eligible for a catch up contribution in the event you reach 50 years of age any day during the calendar year.

Traditional IRA income limits for 2015

If you want to limit your tax liability, then there is no better way than through an IRA. You could restrict your liabilities both in present (Traditional IRA) as also in future (Roth IRA). However, keep in mind that contribution phaseout limits exists which are dependent on the income you make. The great news is that such limits will rise in 2015, even if there was no contribution increase.

If your employer has a retirement plan and you subscribe to it:

Head of household or a single: In case your MAGI touches $61,000 or is less than that, you enjoy a full deduction. It is surpasses $61,000, but lower than $71,000, you get partial deduction. No deduction is applicable of it exceeds $71,000.
Qualified widow/widower or married filing jointly: In case your MAGI touches $98,000 or is less than that, you enjoy a full deduction. It is surpasses $98,000, but lower than $118,000, you get partial deduction. No deduction is applicable of it exceeds $118,000.
Married filing separately: In case your MAGI does not touch $10,000, you can take partial deduction. No deduction is possible if it exceeds $10,000.

If you have a number of 401(k)s sitting idle for a long time, it makes sense to consolidate them and put them into IRAs. The latter carry lower fees. Make maximum use of the traditional IRA contribution limits.

What is the Difference Between Roth and Traditional IRA?

ira comparisonA traditional IRA has back end taxes requiring you to pay taxes when you make withdrawals in retirement. In a Roth IRA, you pay taxes on contributions made to your account; you don’t have to pay any taxes when you take distributions in retirement. That’s the basic difference between a Roth and traditional IRA. Let’s compare and contrast a little more in detail.

Age eligibility
Anyone under 70 ½ years of age and with a taxable income can invest in a traditional IRA.
Anyone drawing a taxable income can open a Roth IRA; there are no age limitations for funding the account.

Maximum contributions
For both traditional and Roth IRAs, the contribution limit is $5,500 for individuals aged under 50, and a catch-up amount of $1,000 for a total of $6,500 in maximum contributions for individuals aged 50 years and above.

The tax deductions for a traditional IRA contribution is phased out for individuals with a workplace retirement plan and a modified gross adjusted income between $61,000 and $71,000, and $98,000 to $118,000 for couples. Those who don’t have a retirement plan at their place of employment but are married to someone who’s covered by a work plan, the deductions are phased out if the couple’s income is between $183,000 and $193,000.

For individuals, the income limit for contributing to a Roth IRA is between $116,000 and $131,000; for married couples, the limit is between $183,000 and $193,000.

Tax deductions

  • Contributions to a Roth IRA are not tax deductible.
  • Deductions will depend on factors such as your income, filing status, whether you are covered by a 401(k) or 403(b) retirement plan at
  • your workplace, and if you get Social Security benefits.

Withdrawals

  • In a traditional IRA, withdrawals are taxable, with a penalty imposed on distributions taken before the age of 59 ½.
  • In a Roth IRA, an original contribution is distributed tax and penalty free. If you are 59 ½ years or older, and if the IRS’s five year aging requirement has been met, then no tax is applied to earnings.
  • A 10 per cent penalty is charged for early withdrawal.

Should you opt for a Roth or traditional IRA?

An understanding of the key differences between a Roth and traditional IRA can help you decide the better plan of the two for your circumstances. Generally, it makes more sense to stay in a traditional IRA if you expect to be in a lower tax bracket upon retirement. This way, when you start making withdrawals after retirement, you’ll be paying lesser in taxes. On the other hand, if you expect to be in the same or higher tax bracket upon retirement, a Roth IRA is the better option.

If you’re not fully sure about what tax bracket will apply to you in the future, you can consider a tax diversified retirement savings strategy. For instance, if you are participating in a tax-deferred 401(k) plan offered by your employer, you can choose a Roth IRA for a mix of tax-free and taxable accounts. The difference between a Roth and traditional IRA will also matter if you don’t want to lock your money for a long time and desire the flexibility to make a withdrawal when you need it.

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.