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?
For 2012, the maximum contribution to an SEP-IRA is the lessor of $49,000 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 $34,000 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.
And as always, consult a tax professional (not a blog) before making any decisions.
Where to Open a SEP IRA
UpdateSince originally publishing this article, I opened a SEP IRA at Scottrade. I’ve been very happy with my decision, in large part because of the low trading costs and the option of visiting a physical Scottrade branch. You can check out a full list of the best brokers for IRA retirement accounts, too.
Rob Berger
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Published or updated December 20, 2012.
{ 25 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 think you can contribute to $2000 *.25 = $400.
for self employed individuals the max percentage is 20%.
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
If you have a 401k and profit sharing plan that takes you to the max of $46,000, can you still contribute to a SEP_IRA for additional self employed income?
Contribution limits are governed by a couple of different rules.
In short though, the maximium limit (46k in years past, 49k in 2010+2011) are combined from employee deferrals, plus match (401k) and profit sharing (401k/PSP or SEP).
If you’re trying to maximize your deferrals from 2 different plans, it really pays to talk to a CPA as part of your tax filing… since many will also indemnify you if they do it wrong and you get a penalty.
Why do I have to take in my contributions to my employer sponsored 401k to reduce my contributions to my self employed sponsored SEP? In first case I am the employee and in the second case I am the employer. It seems like I only have to take into account all contributions if all contributions are made by the same employer.
If I have a small business and I already have a SEP established can I start a nwe 401(k) plan as well? I don’t want to contribute to both in the same year, but am I even allowed to start a new plan if the other exists?
Gathering Sep IRA information and am happy to learn it won’t have to be an either/or situation. I can keep my other plan too.
Thank god for 401k plans. Don’t know what we would do without them!!
I have 2 separate businesses. Can i contribute max to my solo 401kplan and max out a sep plan? thanks
Trav, I have the same question. I am GUESSING that it goes a total of 49k/person regardless of source of income. For instance, I have 2 companies: Company A with an individual 401k and Company B with a SEP-IRA. I am paid a salary of 40k from Company A which allows me to contribute 16,500+10,000 (25% of 40k) = 26,500. If I understand the article correctly, I can still contribute a maximum of 49,000 – 26,500 = 22500 from Company B via a SEP-IRA. Say that I make 80k in Salary from Company B, I can contribute 20K (25% of 80k) into the Sep-IRA. That is my understanding so far at least. Love to hear from others to see if this is accurate
Have a w-2 with $ 5,000 in 401 k plan. 20% of my profit sharing plan from my schedule c is $ 45,000. Can I take the whole $ 45,000 or am I limited to $ 44,000.00.
I have a business with 2 employees that has a sep in place. One employee is also employed full time at another job that will max is $50k in retirement contributions in 2012. Can my business with 2 employees still max the 25% contribution for the 1 employee since the other is already maxed elsewhere?
I have maxed out my Roth 2012 contribution and want to add more funds to my SEP IRA for the same tax year. I have already gotten my tax refund (Fed and State for 2012). How do I report I’ve added additional SEP IRA funds for tax year 2012 to the IRS?
SV, I don’t have the answer to your question, but the following is a link to the IRS website page about SEPs–http://www.irs.gov/publications/p560/ch02.html
Hello DR:
So I have a 401K at work and have maxed it out in 2012 ($17K I think). Me and my wife have our own part-time consulting business as well and have opened a SEP IRA. I can’t do any more personal IRAs (trad/roth) because we exceed the income limit.
I am getting a lot of different answers on how much to contribute to SEP and if its taxable or not. The income from the consulting business is $20K each. I was initially told by one agent that I can contribute 25%, so will $4K be the right number for each of us?
I am assuming this $4K will not be taxable or will this also be bound by the income limit?
Any advice is truly appreciated!
Thanks much. DJ
DJ, my understanding of the SEP IRA is that if you have employees, the figure is 25%. If you don’t have employees, the owner can contribute 20%. But that’s where you need to consult with a tax specialist to be certain. I suspect TurboTax could also walk you through this. Good luck!