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.