NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsHard
A client is looking for a retirement plan that allows for tax-deductible contributions and tax-deferred growth. They are self-employed and want to contribute a significant portion of their income, potentially more than a Traditional IRA allows. They also want a plan that is relatively straightforward to administer. Which of the following retirement plans would be most suitable?
- ASIMPLE IRA
- BTraditional IRA
- CRoth IRA
- DSEP IRA
Show answer & explanationAnswer & explanation
Correct answer: D. SEP IRA
A SEP IRA (Simplified Employee Pension) allows self-employed individuals and small business owners to make tax-deductible contributions (up to 25% of compensation, max $69,000 for 2024), offering higher limits than a Traditional IRA and tax-deferred growth. It is also relatively easy to set up and administer.
Why the other options are wrong
- A. SIMPLE IRAs are for small businesses with employees and have lower contribution limits than SEPs, and require matching contributions for employees.
- B. Traditional IRAs have lower contribution limits, which the client wants to exceed.
- C. Roth IRAs have non-deductible contributions and tax-free withdrawals, not tax-deductible contributions.
SEP IRA (Simplified Employee Pension)
A retirement plan for self-employed individuals or small business owners that allows for significant tax-deductible contributions and tax-deferred growth.
- For self-employed or small businesses
- Tax-deductible contributions
- Tax-deferred growth
- Higher contribution limits than Traditional/Roth IRAs
- Simple to administer
Memory trick: Self-employed can 'SEP'arate for big tax deductions.