Business, Personal Finance, Retirement, Taxes 
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Can I Deduct My SEP-IRA Contributions?

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This was a question posed to me by a recent reader:

Hi Jim,

I see that you’ve written a lot about sep-ira’s and I had a question I hoped you could answer, I was going to make a contribution to my sep-ira, can I deduct that on my taxes?



Thanks,

The answer is yes but where you deduct it will depend on your situation.

Self-Employed Persons

If you are self-employed, you can contribute to an SEP-IRA as either an employer or an employee. When you contribute to the SEP-IRA as an employer, you can deduct that contribution but you deduct it from your business/self-employment income. If you contribute to the SEP-IRA as an employee, you can deduct that contribution from your own income.

Not Self-Employed Persons

If you work for a business that offers a SEP-IRA, you’re going to be contributing as an employee and subject to the rules of a Traditional IRA. So, again you will be able to deduct the contribution but you will be deducting it against your own income.

So to recap, if you are a self employed and contributing as an employer, you deduct it against your business’ income (you are still subject to self employment tax). If you are self-employed and contributing as an employee or you are not self-employed, you deduct it from your own taxes.

Anyone want to add anything? (or fix something I may have gotten wrong?)

{ 19 comments, please add your thoughts now! }

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19 Responses to “Can I Deduct My SEP-IRA Contributions?”

  1. Seven says:

    Is this true? I’ve been self-employed (sole-proprietorship) for many years and was under the impression that the SEP-IRA contribution deduction occurs on the front page of the 1040 (in the Adjusted Gross Income Section) RATHER than against the business income directly (reported on Schedule C). I’ll double-check this. If I’m wrong, I’ve overpaid for years…

  2. jim says:

    It all depends on whether your contribution was as an employee or as an employer, check your brokerage records. You can always recategorize with your brokerage and refile.

  3. Seven says:

    I am a sole proprietor; therefore, I’m both the employer and the employee. I took a quick look at this again, and seems the deduction should be on the 1040, and not the Schedule C. If you have evidence to the contrary, please share!

    • Anonymous says:

      Sole proprietors deducting contributions made for employees, deduct them on schedule C. Sole proprietors deducting contributions for their own SEP IRA, deduct them on the front of the Form 1040.

  4. Sam says:

    I think Seven is correct, though I hope I’m wrong… Please tell me I’m wrong!

    Publication 560 says, in the section ‘Where to Deduct Contributions’:

    “Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C…

    …Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040…”

  5. Marcy says:

    So, if I’m self employed and cash in a life insurance policy for $150,000, $100,000 of which will be regular income, ( my actual business income is miniscule) can I use that income for gauging my SEP IRA contribution?

    thanks, marcy

  6. Jay says:

    Hopefully you can straighten this out for me…
    For years now, my husbands employer has contributed 25% of my husbands salary to a SEP-KEOGH plan. 100% of everything that goes in there is from his employer. We then turn around and put it all in mutual funds.
    I was told that because it was moved by us, we could deduct it from our taxes…so I have been doing so.
    Is this not correct? Do we not get a tax advantage on this?
    I appreciate any info I can get on this subject!
    Thank you!

  7. Mel Wick says:

    can I deduct my employee Sep IRA on my 1040 return, if so what line. Also, can I contribute to a sep ira and in the same year contribute to a traditional IRA

  8. C. Perkins says:

    My husband is covered by a retirement plan, but I am eligible to contribute $5000 to an IRA. I also have $5000 self-employment income. Can I also contribute money to a SEP-IRA? Will this reduce our taxes?

  9. jim says:

    C. Perkins: Is $5,000 self-employment your only personal income? If so, then when you contribute to your SEP-IRA as an employer, your “company” can deduct that from its taxes and thus the company’s income is $0. If $5000 is your only income, then you technically have $0 as income since the $5000 was deducted. Did that make sense? (if not, email me and I can try to clarify)

    I’m pretty sure your husband can give you $5000 to contribute to an IRA but check with a tax expert, it’s a spousal contribution or IRA or something like that. (Google can help)

  10. websurfer555 says:

    Are you kidding? You can only contribute 25% of your net income to a SEP-IRA. Please don’t give bad financial advice.

  11. Harry P. Nuss says:

    My employer contributes 25% of my hourly-paid annual-gross income for the entire year. Accumulating and being deposited once monthly per my monthly gross income. These 100% employer-contributed monies deposit into a money market account. I see contribution on each paycheck stub per period-day (bi-weekly), but he only deposits once a month actually.

    It is then my tax-deferred funds to manage in the market with the help from my advisor.

    It was my understanding that employer-contributed funds never actually come from the EMPLOEE’S(S’) pocket (i.e. employer benefit); therefore, only the employer files these monies on their taxes as deductions, etc… Is this correct, or can the employEE and employer BOTH file deductions for 100% employer contributions to a SEP IRA (even though it’s based off 25 percent of your annual income paid by the employer EMPLOYEES aren’t to add it to their gross annual income per that year on their tax filing?

    If monies are withdrawn from the account before 59+ years old (or some other high number) you then have to file and add those withdrawn monies onto any other income for that year which you withdrew it.

    Can I contibute to another separate IRA (in conjunction with employer contributions) from actual gross income which I claim per year to maximize my retirment growth??

  12. john polychronis says:

    can you do both ? Add contribution as an employer, and then add as an employee, if you are self employed of course.

  13. lekawa says:

    o.k., I just talked to the IRS and here’s what I found out. For MY own situation…which is self employed, sole proprietor, no employees with an income under $55,000, for 2010, I can contribute up to the max for someone under 50 to my tradition IRA and or Roth IRA (the limit for 2010 is $5000) AND…!!!…I can contribute up to 20% of my net profit minus my self-employment deduction (This is my “net earnings” from self-employment)to my SEP. There is a worksheet entitled “Deduction Worksheet for Self-Employed” in Chapter 5 of Pub 560 to figure out your maximum contributions. THEN in pub 590 see “Affect of Modified AGI deduction If You Are Covered By A Retirement Plan At Work” to figure out if you can claim a full deduction/partial deduction/no deduction on your Traditional IRA contributions. You can always call the IRS helpline at 1800-829-1040 to ask specific questions. Every now and then you can actually get someone who is friendly and wants to help! (sometimes not) :)

  14. tqd says:

    for the people wondering where it says you can deduct from your schedule C, please check out this website:

    http://www.irs.gov/retirement/article/0,,id=137864,00.html

    Specifically:
    “Sole proprietors may deduct them on Schedule C (Form 1040 U.S. Individual Income Tax Return), Profit or Loss From Business, or Schedule F (Form 1040 U.S. Individual Income Tax Return), Profit or Loss From Farming”

    The advantage of deducting from schedule C is that you don’t have to pay SE tax on it. If you contribute a lot, this can be a huge deal. For example, if you make 250k a year and put 60k of that into your ira, you don’t have to pay SE tax on that 60k (just the 2.9% medicare), which can come out to 1.74k.

    So the moral of the story… deduct via schedule C saves you 1.74k.

  15. Dima says:

    tdq – unfortunately, this is not correct and applies only to contributions made for your employees. Prior to the frase you quote is says: “Deduct the contributions you make for your common-law employees on your tax return.”

  16. Anonymous says:

    we owe $6800.00 in taxes. if we put 5000 in sef ira how much will that reduce our taxes we have to pay

    john c.

  17. Anonymous says:

    Do I deduct my SEP IRA contribution on 1120 S or on 1040. I am 100% owner of a small S corp. Is it 25% of my w2 salary or is it 25% of total income (k1 income +w2 income). IRS publication 560 says if I deduct on 1120 s, I have to provide SEP IRA for all eligible employees. Is there any problem with deducting in on 1040? What are thetax pros and cons?

    Thanks

  18. Mick says:

    Publication 560
    “Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C…”
    “Sole proprietors…deduct contributions for themselves on line 258 of Form 1040.”
    Remember, that sole proprietors can’t deduct as a business expense conributions made to a SEP for themselves, only those made for their common law employees.

  19. Angel says:

    Hello. I opened a sep-ira when I was self-employed but now work for someone else who now pays into a sep-ira for his employees. This year I tried to contribute $6K to my sep-ira but the place on a 1040 for a contribution (line 28) only allows for a traditional IRA contribution if you make less than $68K and I don’t. Is there anywhere else on a 1040 or schedule to take the sep-ira deduction if I am not self-employed? Thank you.


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