Retirement Planning

Don’t Make the Same $100,000 Retirement Mistake I Just Made

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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 hit home for me a few years ago due to the income generated from this website. To get right to the point, the answer to the question is yes, as I’ll explain in a minute.

So, what's the $100,000 mistake? Based on my accountant's advice, I mistakenly contributed far less to my SEP IRA than I could have. The mistake had to do with whether 401k contributions at work limit the amount you are entitled to contribute to a SEP IRA based on unrelated self-employed income. It was a painful lesson, as you'll hear in the podcast. Here are the details:

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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, you can set up a SEP for your self-employed business even if you participate in your employer's retirement plan at a second job."

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 a SEP-IRA?

The tax advantages are similar to a 401k. You can deduct your contributions and your earnings grow tax-deferred. You will be taxed on withdrawals from a SEP-IRA.

What’s the maximum contribution to a SEP?

The maximum contribution depends in part on whether the contribution is for an employee or, in the case of those self-employed, the owner. For 2017, the maximum contribution on behalf of an employee to a SEP IRA is the lesser of $54,000 or 25% of your ‘eligible compensation.’ For the self-employed, the contribution limit in 2017 is the same: the lesser of $54,000 or 25% of earnings, according to the IRS.

Now, to the question my accountant got wrong. Let's assume that in addition to self-employed income, you also have a regular job where you contribute to a 401k. Do your 401k contributions reduce the amount you can contribute to a SEP IRA?

The answer is no, assuming that the 401k and SEP IRA are with two different companies not under common control. Why? While the employee contribution limits to a 401k are per person, the employer contribution limits (including a SEP IRA for the self-employed) are per plan.

As always, consult a tax professional (not a blog) before making any decisions.

Where to Open a SEP IRA

In 2010, I opened a SEP IRA at TD Ameritrade (Formerly 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

Rob Berger

Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at RobBerger.com.


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