WealthRabbit Support

 Feature

SEP IRA

Traditional IRA

Purpose

Designed for self-employed individuals and small business owners to provide retirement benefits for themselves and their employees.

Intended for individuals to save for retirement independently of employer-sponsored plans.

Eligibility

Any business owner with one or more employees or anyone with freelance income can establish a SEP IRA.

Any individual with earned income can contribute; however, tax deductibility may be limited if a workplace retirement plan covers the individual or their spouse and their income exceeds certain levels.

Who Contributes

Only employers make contributions for eligible employees; employees do not contribute.

Individuals make contributions to their accounts; employers do not contribute.

Contribution Limits (2024)

Employers can contribute up to 25% of an employee's compensation or $69,000, whichever is less.

Individuals can contribute up to $7,000 annually, with an additional $1,000 catch-up contribution if aged 50 or older.

Tax Treatment

Contributions are tax-deductible for the employer; funds grow tax-deferred until withdrawal.

Contributions may be tax-deductible depending on income and participation in other retirement plans; earnings grow tax-deferred until withdrawal.

Withdrawal Rules

Withdrawals before age 59½ may incur a 10% penalty and are subject to ordinary income tax; required minimum distributions (RMDs) must begin at age 73.

Similar to SEP IRAs, early withdrawals before age 59½ may incur a 10% penalty and are subject to ordinary income tax; RMDs must begin at age 73.

Deduction Eligibility

Allowed in full up to the contribution limit.

Allowed in full if there is no workplace retirement plan; otherwise, the deduction is reduced based on income.

Used By

Business owners who are self-employed and have taxable compensation.

Individuals with taxable compensation.