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SEP-IRA and 401K–Can you contribute to both?
If you have self-employed income in addition to your regular job, can you contribute to a SEP IRA even if you have a 401k at work? This question has hit home for me this year because I’ll have income from this website. While I’ve decided that the income is not enough to warrant opening an SEP-IRA, I still want to understand what the qualifications and limitations are so I can plan for next year. To get right to the point, the answer to the question is yes. Here are the details.
If an employee participates in his or her employer’s retirement plan, can he or she set up a SEP for self-employment income?
The IRS has answered this very question: “Yes. A SEP can be set up for a person�s business even if he or she participates in another employer’s retirement plan.” This answer comes from an IRS FAQ about SEP plans. That’s good news for bloggers, many of whom are employees with 401k plans in addition to self-employed income.
What are the tax advantages of an SEP-IRA?
The tax advantages are similar to a 401k. You can deducted your contributions and your earnings grow tax deferred. You will be taxed on withdrawals from an SEP-IRA.
What’s the maximum contribution to an SEP?
In 2007, the maximum contribution to an SEP-IRA is the lessor of $45,000 or 25% of your ‘eligible compensation.’ These limits apply to all contributions to defined benefit plans, which means you have to take into account 401k contributions when determining the maximum contribution to an SEP-IRA. So if you contributed $15,000 to a 401k, your maximum SEP-IRA would be $30,000 or 25% of your ‘eligible compensation,’ whichever was less. If you are self-employed, however, the definition of ‘eligible compensation’ gets more involved, the result being that the maximum percentage is 20% (not 25%). You’ll find more details in IRS Publication 560.
{ 9 comments… read them below or add one }
Great information–thanks.
I was actually wanting to look into this and it just happened to pop up in my feed reader.
Yay!
The question I’m still trying to find the answer for is: what if I have a 401k and an individual Roth IRA…can I still open a SEP-IRA through my side biz and contribute? I’ve found some people saying it’s fine, some people saying you can’t have your personal and a SEP IRA. What have you found?
Tyler, interesting question. Of course, you can contribute to a 401k and SEP as I covered in this article. In addition, in the context of Roth accounts, the IRS has stated that you can contribute to both an SEP and Roth IRA: “Yes, you can make a contribution to a SEP-IRA and a Roth IRA.” This is taken from a FAQ from the IRS which you can read here: http://www.irs.gov/faqs/faq-kw30.htmlObviously you should consult an SEP specialist. I’d suggest talking to the brokerage company with whom you plan to open the account. I have a rollover IRA with Vanguard, and they were very helpful in answering similar questions. Good luck!
This is helpful, but one remaing question: Does the emmployer match count toward the total 401(k) + SEP limit, or just what the employee contributed?
Thank you for publishing the information. I do have a question however. I already have a SEP, have my own business and also work as contracted labor for another company. This other company issues me a W-2 and offers no benefits, i.e, the contract labor classification. Can I contribute up to 20% of my contracted wages from the W-2 as well as my net from Schedule C into my SEP, or must I open up another IRA, which doesn’t make sense since I won’t have the advantage of pooling all my retirement funds? Thank you.
JR, I would recommend that you take a look at IRS Pub. 560, which you can download from a link in the article. As you’ll see in Pub. 560, a common law employee cannot set up his or her own retirement plan such as an SEP from that income ( you have self-employed income too, which is a separate matter). Whether you are a common law employee depends on several factors, which are described in the publication.
I’m having a hard time grasping the maximum contribution part, even after reading through IRS Pub. 560. Maybe you can help if I supply details. Let’s say I make $40,000 at a regular job, and make $2,000 from blogging. I contribute $4,000 to my regular work 401k and $5,000 to a Roth IRA. How much can I contribute to a SEP-IRA?
I have a small business and pay myself a salary (W2) and contribute 25% to a SEP IRA.
In 2008 my children get an adhoc salary (ages 17 and 19 and on W2).
Also, in 2008 I have an employee who also has another job with Company X where he participates in a 401K plan.
I’m led to beleive that all employees on the payroll have to recieve the same %age of SEP IRA contributions.
Since my employee is already in a 401K plan can I also contribute to a SEP IRA for him?
If not, is there a legal obligation for me to compensate the employee and can I continue to contribute to my SEP IRA? Also, do I have to contribute to my childrens SEP IRA?
Your answers will really be appreciated.
Thanks.
Soyab
This is helpful, but one remaing question: Does the emmployer match count toward the total 401(k) + SEP limit, or just what the employee contributed? Could somone please answer this questions