Many people reach a point in their financial planning where saving more for retirement becomes a priority. This often leads to a closer look at IRA options, especially when income grows or business ownership changes how contributions can be made. The rules can feel similar across accounts at first glance, yet the tax treatment, eligibility, and contribution limits vary in meaningful ways. Those differences affect how much someone can save and when the tax benefits show up.
Read on for a clear comparison of Traditional, Roth, and SEP IRAs. You will see how each one works, how taxes apply, and who can use them. The goal is to give you a grounded starting point before you decide which IRA structure may align with your retirement planning needs.
Comparing Traditional, Roth, and SEP IRAs
Choosing between a Traditional, Roth, and SEP IRA often starts with understanding who each plan is designed for and how contributions and withdrawals are treated. Even though all three fall under the broader category of individual retirement accounts, their rules differ in ways that affect tax planning, eligibility, and long-term savings potential. The table below offers a clear snapshot before we walk through the details.
Overview
| Plan | 2025 Contribution Limit | Withdrawals | Eligibility |
| Traditional IRA | $7,000 (or $8,000 if age 50+) | Taxed as regular income | Anyone with compensation; deduction may phase out |
| Roth IRA | $7,000 (or $8,000 if age 50+) | Qualified withdrawals are tax-free | Anyone with compensation within 2025 income limits |
| SEP IRA | $70,000 | Taxed as regular income | Business owners and self-employed individuals |
Traditional IRA
A Traditional IRA allows any individual with earned income to contribute. Savings grow tax deferred, and withdrawals in retirement are taxed as regular income. Deductibility is not automatic. It depends on:
- Whether you or your spouse is covered by a workplace retirement plan
- Your modified adjusted gross income for 2025
- Your filing status
This structure may appeal to individuals looking for potential current-year tax benefits through deductible contributions.
Roth IRA
A Roth IRA accepts contributions only if your income falls within the 2025 limits. Money goes in after taxes, and qualified withdrawals in retirement are tax-free once the account meets the 5-year aging rule and you reach age 59½ or experience another qualifying event. Many savers value the predictability of tax-free income later in life.
SEP IRA
A SEP IRA functions similarly to a Traditional IRA but allows much larger contributions. Only employers can fund a SEP IRA, and contributions are deductible to the business. These contributions remain tax deferred until distributed. To participate, you must be self-employed or own a business.
📝 Note: If you have employees, the same equal-percentage contributions must be made for each eligible employee.
Contribution Limits for 2025
IRA limits shape how much you can set aside each year. Even though Traditional and Roth IRAs share the same annual limit, their tax rules differ. SEP IRAs stand out with a significantly higher ceiling.
Traditional IRA
- Limit: $7,000
- Deductibility may phase out depending on workplace coverage and income
- Growth is tax deferred, and distributions are taxed as income
Roth IRA
- Limit: $7,000
- No deduction for current-year contributions
- Qualified withdrawals are tax-free if rules are met
SEP IRA
- Limit: Lesser of 25% of compensation or $70,000
- Contribution rate is generally 25% for incorporated businesses and effectively 20% for unincorporated businesses
- Entirely employer-funded
- Must apply the same contribution percentage to eligible employees
- Contributions are made pre-tax and taxed when distributed
📝 Note: The SEP IRA limit is more than 10 times higher than the Traditional or Roth limit, which can meaningfully increase retirement savings for eligible business owners.
Catch-Up Contributions
Catch-up rules allow individuals age 50 or older to save more.
Traditional IRA
- Additional $1,000 catch-up
- Total possible contribution for 2025: $8,000
Roth IRA
- Same catch-up structure as a Traditional IRA
SEP IRA
- No catch-up contributions
- The limit is identical regardless of age
Income Limits
Income rules determine whether contributions are allowed (Roth) or deductible (Traditional). SEP IRAs are simpler because income does not restrict eligibility.
Traditional IRA
There are no income limits on contributing. However, deductions phase out if you or your spouse has access to a workplace plan. For 2025, deduction phase-out ranges are:
- Single/Head of Household: $79,000–$89,000
- Married Filing Jointly (active participant): $126,000–$146,000
- Married Filing Jointly (you not covered, spouse covered): $236,000–$246,000
- Married Filing Separately: $0–$10,000
Roth IRA
You can contribute only if your income is within the 2025 limits:
- Single/Head of Household: $150,000–$165,000
- Married Filing Jointly: $236,000–$246,000
- Married Filing Separately (if you lived together): $0–$10,000
Once your income exceeds the top of the range, you cannot contribute directly. Some taxpayers use a Roth strategy through a Traditional IRA contribution followed by a Roth conversion.
SEP IRA
- No income limits for participation or contributions.
Investment Options
Investment availability depends on the custodian. Most IRAs offer access to:
✅ Stocks
✅ Bonds
✅ Mutual funds
✅ ETFs
Self-directed IRAs expand the menu to include alternative assets. These accounts must still follow IRS rules around prohibited transactions and cannot hold collectibles.
Many investors use structures that allow checkbook control structures, often through an IRA-owned LLC. These offer more control over investment execution but still require an IRS-approved custodian and strict compliance with IRS rules.
Withdrawal Rules
Each IRA type follows its own withdrawal framework, especially regarding penalties and tax treatment.
Traditional IRA
- Qualified distributions available starting at age 59½
- Earlier withdrawals generally trigger a 10% additional tax plus income tax unless an exception applies
Roth IRA
- Contributions can be withdrawn at any time
- Earnings require two conditions:
- The account must be at least 5 years old
- You must reach age 59½ or meet another qualifying event
SEP IRA
- Follows the same withdrawal rules as a Traditional IRA
Taxes on Withdrawals
Traditional IRA
- Distributions are taxed as ordinary income
- Non-deductible contributions create basis, which makes part of each withdrawal non-taxable
Roth IRA
- Qualified withdrawals are entirely tax-free
- Contributions were already taxed when made
SEP IRA
- Taxed the same way as Traditional IRA distributions
Required Minimum Distributions (RMDs)
Traditional IRA
RMDs begin at age 73 in 2025.
- First RMD: April 1 of the year after turning 73
- Future RMDs: Due by December 31 each year
- Missed RMDs may incur a 25% excise tax, possibly reduced to 10% if corrected promptly
Roth IRA
- No RMDs during the account owner’s lifetime
- Funds can continue growing tax-free indefinitely
SEP IRA
- RMDs apply and follow the same rules as a Traditional IRA
📝 Note: Required minimum distributions are calculated by taking your account balance on December 31 of the previous year, and dividing it by your life expectancy factor. You can calculate your RMD amounts using this table.
📌 Also read: IRA Required Minimum Distributions
Wrapping It Up
Traditional, Roth, and SEP IRAs all support long-term retirement saving, yet each one applies different rules for eligibility, contributions, and taxes. These differences can influence how much you set aside each year and when the tax benefits appear. Some individuals focus on deductible contributions today. Others prefer the long-term flexibility of tax-free withdrawals. Business owners often look to the higher SEP IRA limits when they want to contribute more.
A few neutral considerations may help as you compare options:
- Review how each account’s tax treatment fits your income pattern.
- Look at contribution limits alongside your saving capacity.
- Think about how future Roth conversions, catch-up contributions, or employer-funded plans may influence your planning.
These points can guide your evaluation as you determine which IRA structure may suit your retirement goals.
Disclaimer:
The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.
The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.
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