Types

• A Roth IRA is a type of individual retirement arrangement, which is a tax-advantaged retirement savings account established by a single person. Contributions may be made by the account owner or spouse. A SEP IRA, or simplified employer pension plan, is also an individual retirement account. However, a SEP-IRA allows for employer contributions to be made to the account.
  
  

Benefits

• Both Roth IRAs and SEP IRAs provide tax-deferred capital gains and interest on all money invested in the account. Roth IRAs do not offer a tax deduction for contributions, however, all money withdrawn in retirement may be taken tax-free. SEP IRAs offer a business tax deduction for contributions made by the employer. Funds withdrawn in retirement are taxable to the employee account holder as ordinary income.
  
  

Employer SEP Contributions

• Businesses may deduct the total amount of contributions made to employees' SEP-IRAs, up to 25 percent of each employee's compensation. A maximum of $245,000 in compensation may be considered for the 25 percent rule.
  
  

Employee SEP IRA Contributions

• Other than being established under the business' SEP agreement, and the ability for an employer to make contributions to an employee's SEP-IRA account, SEPs are generally no different than a traditional IRA account. Employees may make contributions to their SEP-IRA with the same rules regarding the deductibility of contributions and annual contribution limits that apply to traditional IRA accounts. Having a SEP-IRA account does not restrict an employee's ability to have a Roth IRA or traditional IRA.
  
  

SEP-IRA and Roth IRA Contributions

• Employer contributions made to a SEP-IRA are considered contributions by the business and do not count in any matter for the employee. Thus, an employee may make her allowable annual IRA contribution regardless of any contributions made by the employer. A taxpayer may contribute up to $5,000 per year to an IRA. Taxpayers over age 50 may also contribute an additional catch-up contribution of $1,000 per year. This contribution can be divided between a Roth IRA, traditional IRA or the employee's SEP-IRA in any manner desired.