SEP IRA vs. Roth IRA: Which Retirement Account Is Actually Better For You?

Are you scratching your head trying to figure out whether a SEP IRA or Roth IRA is better for your retirement plans? You’re not alone! As someone who’s spent countless hours researching retirement options for both myself and our blog readers, I can tell you that this decision ain’t always straightforward. The right choice depends on your specific situation – especially if you’re self-employed or run a small business.

Let’s dive into the nitty-gritty of both retirement accounts so you can make a choice that’ll actually work for your future.

What’s a SEP IRA Anyway?

SEP stands for Simplified Employee Pension, and it’s an Individual Retirement Account designed especially for business owners and self-employed folks. Think of it as the entrepreneur’s retirement buddy.

Here’s the deal with SEP IRAs:

• Employer contributions only: Only the employer (which might be you if you’re self-employed) can contribute to a SEP IRA
• Higher contribution limits: You can contribute up to 25% of compensation or $70,000 in 2025 (up from $69,000 in 2024), whichever is less
• Tax-deferred growth: You don’t pay taxes on your investments while they grow in the account
• Tax-deductible contributions: Contributions reduce your taxable income right now
• Required minimum distributions (RMDs): You must start taking money out at age 73 (or age 75 if born in 1960 or later)

If you’ve got employees there’s a big catch – you have to contribute the same percentage of compensation to all eligible employees’ accounts as you do to your own. So if you put in 20% for yourself you gotta do 20% for everybody else too!

And What About Roth IRAs?

A Roth IRA is a totally different animal It’s an individual retirement account that anyone with earned income can open (assuming they don’t make too much money)

Here’s the skinny on Roth IRAs:

• After-tax contributions: You pay taxes on money now before it goes into the account
• Tax-free growth and withdrawals: Your investments grow tax-free AND you don’t pay taxes when you take the money out in retirement
• Lower contribution limits: Only $7,000 in 2024 and 2025 (or $8,000 if you’re 50 or older)
• Income restrictions: You can’t contribute if your income exceeds certain limits
• No RMDs: You’re never forced to take money out during your lifetime
• Flexible withdrawals: You can take out your contributions (not earnings) anytime without penalties

For 2025, you can’t contribute to a Roth IRA if you make more than $165,000 as a single filer or $246,000 if married filing jointly. There’s a phase-out range where you can make partial contributions if you earn just under these thresholds

The Big Showdown: SEP IRA vs. Roth IRA

Let’s compare these retirement accounts head-to-head:

So Which One’s Better? It Depends!

The honest truth is that whether a SEP IRA or Roth IRA is better depends on your unique situation. Here’s how to figure out which might be right for you:

A SEP IRA Might Be Better If:

1. You’re a high-income business owner or self-employed person who wants to save a LOT for retirement. The high contribution limits of a SEP IRA blow the Roth IRA’s limits out of the water.

2. You want tax savings now rather than later. SEP contributions are tax-deductible, reducing your current tax bill.

3. You have a higher income now than you expect to have in retirement. If you’ll be in a lower tax bracket when you retire, paying taxes later (with a SEP) could make more sense.

4. You don’t have employees or you’re willing to contribute the same percentage for all eligible employees.

A Roth IRA Might Be Better If:

1. You expect to be in a higher tax bracket in retirement than you are now. Pay taxes at your lower rate today, enjoy tax-free withdrawals later.

2. You want flexibility in withdrawals before retirement. The ability to take out contributions anytime without penalty is a huge plus.

3. You want to avoid RMDs and let your money grow tax-free for as long as possible.

4. You want to leave tax-free money to your heirs. A Roth IRA can be an excellent estate planning tool.

5. You’re just starting out or have moderate income levels that make the Roth contribution limits sufficient for now.

Can You Have Both? Absolutely!

Here’s a little secret many folks don’t realize – you can actually have BOTH a SEP IRA and a Roth IRA! This strategy gives you the best of both worlds:

• Tax deductions today through your SEP IRA
• Tax-free growth and withdrawals tomorrow through your Roth IRA
• Diversified tax treatment in retirement
• Higher total contribution potential

Just remember that having a SEP IRA can affect the deductibility of traditional IRA contributions (though not Roth IRA eligibility directly).

Real-World Examples

Let me share a couple examples to make this more concrete:

Example 1: Sarah the Freelance Designer
Sarah makes about $100,000 per year as a self-employed graphic designer. She wants to maximize her retirement savings and reduce her current tax bill. A SEP IRA allows her to contribute up to $20,000 (20% of her net self-employment income), giving her a significant tax deduction now while building her retirement nest egg.

Example 2: Miguel the Marketing Manager
Miguel earns $75,000 at his marketing job where he has a 401(k). He’s also doing side gigs that bring in an extra $15,000. He’s already maxing his workplace 401(k), but wants to save more. A Roth IRA is perfect for him – he can contribute $7,000 from his side hustle income and enjoy tax-free growth and withdrawals later.

A Few Gotchas to Watch Out For

Every retirement account has its quirks, and these two are no exception:

• SEP IRA employee requirements: If you have employees that are 21 or older and have worked for you in 3 of the last 5 years, you generally must include them in your SEP plan

• Roth IRA income calculations: The income limits are based on your modified adjusted gross income (MAGI), which requires some calculation

• Tax planning complexity: Having multiple retirement accounts can complicate your tax situation

My Final Two Cents

After helping dozens of small business owners figure out their retirement strategies, I’ve noticed that many entrepreneurs benefit from starting with a SEP IRA in their highest-income years, then potentially converting portions to a Roth IRA during lower-income years (though this strategy needs careful tax planning).

For W-2 employees with side hustles, often the Roth IRA makes more sense for that extra income, especially if they already have tax-advantaged retirement options through their main job.

The most important thing is to actually START saving for retirement. Whether you choose a SEP IRA, a Roth IRA, or both, taking action now puts you ahead of most Americans who aren’t saving enough for their future.

Remember, this decision doesn’t have to be permanent either. As your income, tax situation, and goals change throughout your career, you can adjust your retirement saving strategy accordingly.

What retirement accounts are you currently using? Have you found one option works better for your situation? Drop me a comment below with your experiences – I’m always curious to hear what’s working for real people!

Note: While I’ve made every effort to provide accurate information, tax laws and retirement account rules change frequently. Always consult with a qualified financial advisor or tax professional before making major financial decisions.