I am a self-employed individual working in the software industry; my current salary is commensurate to the market value of a software developer with 5 years of experience. I have not yet opened up a retirement account, but need one to get started with investing.

Although a SEP-IRA permits higher contributions, it appears that, unlike the Roth, all your capital gains are taxed upon withdrawal at age 59. On the other hand a Roth IRA account requires a maximum income between 120k and 180k, depending on whether or not you have a spouse.

Does the tax break provided by the Roth outweigh the higher contributions permissible with a SEP?

Furthermore, if for some reason I decide to enter traditional employment I will no longer be able to contribute towards a SEP-IRA.

Please share some insight on the advantages and disadvantages of a SEP vs Roth, and which might be more beneficial for my situation.

Also, if it's not too much to ask, a lot of folks seem to have a Roth IRA in addition to their traditional 401(k), matched by their employer. What is the purpose of doing so? Is the employer match the only benefit of a 401(k)?


2 Answers 2


First, I don't know what income level you are hinting at. So I'd first suggest you understand your current marginal tax rate. (Article is 2012, numbers shifted slightly for '13) The SEP is a pretax plan with a limit of 25% of income, or $51,000 whichever is lower. The Roth has a $5500 limit this year and is post tax money. If you plan to save $5500, you can use a Traditional IRA or Roth IRA, but if the high limit appeals to you, the SEP is advised. Add a comment and I'll update/edit here, if you still have a question. It's easy to answer in far greater detail than one really needs. When you become a W2 employee, you can transfer the SEP to a standard IRA account, withe potential to convert to Roth if you wish.

The 401(k) has a decent sized deposit limit, $17,500 in 2013. It can be either traditional (pre-tax) or Roth flavored (post tax). We are starting to really understand that the expenses within the account can negate the benefit when high enough. Consider, I can buy an S&P ETF for .05%/yr. If the 401(k) is costing 1% per year, after 10 years I've lost enough that I'd be just as well off by saving the money in a taxable account. So, you'll read "look at the fees, do the math, and deposit up to the match but no more if expenses are high. Many companies deposit a dollar for dollar match on the first 5-6% of income. It would take a combined horrific fee and long employment to negate that 100% match.


The big advantage of the SEP is much higher contribution limits. However, it's funded with pre-tax dollars and thus you pay income tax (not capital gains) on the withdrawals.

You can get the best of both worlds, though--Roth versions of SEPs exist. They're funded with after-tax dollars and you pay no tax on withdrawal.

  • 1
    Since when there are Roth versions of SEP IRA???
    – littleadv
    Aug 23, 2013 at 3:44

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