SEP IRAs are often utilized by the self-employed, but anyone with a business can use this tax-advantaged retirement vehicle. You can contribute to both a SEP IRA and a traditional IRA in the same year, but there are some factors to consider. Contribution limits can vary based on whether you're the business owner, and different rules might apply depending on the plan's rules. SEP stands for Simplified Employee Pension.
Employer contributions to a SEP IRA do not prohibit an employer from also giving the maximum allowable to a traditional IRA. This is among the many reasons SEP IRAs are so popular among the self-employed. It allows self-employed people to take advantage of tax-deferred growth in both accounts, which makes growing and protecting your wealth for retirement that much easier.
If your employer has a SEP IRA, you may or may not be able to contribute your own money to the SEP, on top of the funds your employer provides. Your ability to add to your employer's SEP IRA depends on the rules of the plan. Your company's office manager or human resources department should be able to answer this question for you. If the plan allows employee contributions, you should be aware that any personal contribution made by you to the SEP IRA will reduce the amount you will be allowed to contribute to a traditional IRA.
Because of the tax-advantaged nature of SEP and traditional IRAs, both are subject to the tax code, which is subject to the whims of Congress. So in any given year, the amount you are allowed to contribute to both plans is subject to change. Before contributing, you should consult IRS Publication 560 to determine your contribution limits for SEP IRAs, and check IRS Publication 590 for limits on traditional IRAs. Contribution limits for a traditional IRA were $5,000 per individual as of 2012, or $6,000 including your spouse. The maximum contribution to a SEP plan is the lesser of $49,000 or 25 percent of participant's compensation, and it is subject to cost-of-living adjustments.
If you have a business that is not self-employment and you have a SEP IRA, you can deduct 25 percent of all participants' compensation. If you are self-employed, you will need to consult either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, depending on your plan's contribution rate, in Chapter 5 of IRS Publication 560. You would then figure your maximum deduction by using the Deduction Worksheet for Self-Employed, which also is in Chapter 5. For traditional IRAs, if you are covered by an employer plan, such as a SEP, your deductions might be limited. As always, you should consult with your tax adviser before taking such deductions.
Wayne Marks has more than 20 years of experience in finance, education, public relations and marketing in both New York City and Washington, D.C. He has worked for corporate and nonprofit organizations and holds a certificate from the Wharton School of Business.