If you’re self-employed, saving for retirement is your responsibility. Two common tools are SEP IRAs and annuities, but they work in different ways. An SEP IRA gives you tax advantages, control over investments and flexibility. An annuity offers guaranteed income, but usually with less access to your money and slower growth. Understanding the differences can help you choose an option that fits your goals and timeline.
A financial advisor can also help you weigh the pros and cons of a SEP vs. annuity while building a retirement strategy for your specific situation.
SEP vs. Annuity
A SEP IRA is a retirement savings account for self-employed individuals and small business owners. It allows you to contribute a percentage of your income each year and gives you full control over how you invest your funds.
An annuity, on the other hand, is a financial contract with an insurance company. You pay a lump sum or a series of payments, and, in return, the insurer promises a guaranteed stream of income in the future. Annuities are often preferable when you want lifetime income guarantees rather than investment growth.
These are some of the key areas where they differ.
How It Works
- SEP IRA: You set up the account through a financial institution, make contributions (up to 25% of your net earnings or $70,000 in 2025, whichever is less) and choose your investments.
- Annuity: You buy a contract from an insurer. Payments can begin immediately via an immediate annuity or at a future date with a deferred annuity.
How to Invest Your Money
How Your Money Is Paid Out
- SEP IRA: You control withdrawals once you reach retirement age. You can take out as much or as little as you like, subject to required minimum distributions (RMDs) starting at age 73 (75 starting in 2033).
- Annuity: You receive regular payments based on the contract terms. Payments can last for a set number of years or your entire lifetime.
Tax Considerations
- SEP IRA: Contributions are generally tax-deductible with tax-deferred growth. Withdrawals are taxed as ordinary income.
- Annuity: Premiums use after-tax dollars for payment unless purchased within a retirement account. Growth is tax-deferred, but payouts are taxed as income.
Early Withdrawal Options
- SEP IRA: Withdrawals before age 59 1/2 incur a 10% penalty plus income taxes, unless an exception applies.
- Annuity: Early withdrawals may be subject to surrender charges and a 10% IRS penalty if taken before age 59 1/2.
SEP vs. Annuity: Summary of Key Differences
| Feature | SEP IRA | Annuity |
| How It Works | Self-directed retirement account | Insurance contract for future income |
| Investment Choices | Stocks, bonds, mutual funds, ETFs | Fixed, variable, indexed returns |
| Payouts | Flexible withdrawals after 59½ | Guaranteed income streams |
| Tax Treatment | Tax-deferred growth; taxed at withdrawal | Tax-deferred growth; taxed at payout |
| Early Withdrawal Penalties | 10% penalty + income tax before 59½ | 10% IRS penalty + possible fees |
SEP IRA vs. Solo 401(k)
If you are self-employed, you might also consider a Solo 401(k) alongside a SEP IRA. Both are retirement savings vehicles, but they offer different advantages.
- Contribution limits: Solo 401(k)s allow greater flexibility in contributions because you can contribute both as an employer and employee.
- Catch-Up contributions: They allow those over 50 to make additional catch-up contributions; SEP IRAs do not.
- Loan availability: Solo 401(k)s often allow loans against your savings, while SEP IRAs do not.
- Administration: SEP IRAs are simpler to set up and maintain, while Solo 401(k)s require more paperwork and possible annual IRS filings.
Choosing between a SEP IRA vs. Solo 401(k) depends on your income level, savings goals and need for flexibility. A financial advisor can also help you create a customized strategy to build and protect your retirement savings.
Types of Annuities
If you decide an annuity is a better fit, it is important to understand the different types and how they work. These are some of the most common types of annuities to consider.
- Fixed annuities: Provide guaranteed payments and a set interest rate.
- Variable annuities: Offer payments that vary based on investment performance.
- Indexed annuities: Link your returns to a market index (like the S&P 500) but often with caps and floors to limit gains and losses.
- Immediate annuities: Start paying income right away.
- Deferred annuities: Delay payments to a future date, allowing earnings to accumulate tax-deferred.
Self-employed individuals often favor deferred annuities if they plan to retire many years down the road. However, each type of annuity offers a different balance between growth potential, income stability and risk.
Bottom Line
Choosing between a SEP IRA and an annuity ultimately depends on your retirement goals, risk tolerance and how hands-on you want to be with your investments. A SEP IRA offers more growth potential and flexibility but comes with market risks. An annuity can provide peace of mind with guaranteed income but usually sacrifices liquidity and can involve higher costs. In many cases, combining both options may create the right balance between growth and stability.
Retirement Planning Tips
- A financial advisor can help you determine whether your nest egg is big enough to pay for retirement and recommend strategies to grow it. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s Social Security calculator can help you estimate future monthly government benefits.
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