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Differences Between Traditional IRA & SEP Contribution

Posted by Admin Posted on Feb 05 2016

   

by Patricia Jones CPA/ABV CFF CFE
 

It is important to save for retirement and there are several different types of retirement plans.  Today we are going to compare a traditional IRA (Individual Retirement Account) and SEP (Simplified Employee Pension) for a self-employed individual.    

      Traditional IRA                                                           
  • Maximum contribution $5,500; $6,500(50 years old & over) for 2015 & 2016
  • Contribution must be made on or before April 15, 2016 for the 2015 tax year.
      SEP (Simplified Employee Pension)
  • Maximum contribution 20% of net earnings
  • Contribution must be made on or before filing due date of tax return with extension.  For the 2015 tax year, an individual has until October 15, 2016 to make the SEP contribution.
 
In our example the self-employed individual is under the age of 50 and has no employees.  The net income for 2015 year is $50,000.  With the traditional IRA, the maximum contribution that can be made is $5,500 compared to $9,293 maximum contribution allowed for the SEP. 
 
       
  IRA   SEP IRA
Schedule C  Income              50,000                 50,000 
SE Deduction              (3,533)                (3,533)
Maximum Contribution               (5,500)                (9,293)
Adjusted Gross Income              40,967                 37,174 
Standard Deduction              (6,300)                (6,300)
Personal Exemption              (4,000)                (4,000)
Taxable income              30,667                 26,874 
       
Federal Income Tax                4,139                   3,570 
Self Employment Tax                7,065                   7,065 
       
Total tax              11,204                 10,635 
 
 
Please feel free to use the calculator tools available on our site by clicking hereIf  you have questions or would like to discuss IRAs or SEPs with one of our professionals, please contact us at 727-845-4166 or visit our website at www.jonescpas.com.

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