Personal Finance, Retirement, Taxes 

SEP-IRA and IRA Contribution Limits

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I recently got asked this question and I thought that I’d throw both the question and my answer out there in case anyone else was interested (or had corrections).

Can I contribute to an IRA and not deduct it on my taxes because I also have a SEP-IRA?

First off, I am not a tax professional so I recommend that you speak with someone who is before preparing your taxes. That being said, I can give you my best shot of an answer, which is based on information that I, myself, believe to be true.

Not knowing more about which IRA you’re talking about, Traditional or Roth, I can’t speak to whether you can deduct it on your taxes because you deal with both differently and deductibility has nothing to do with the SEP-IRA itself. However, before we can even talk about the unspecified IRA, we need to talk about your SEP-IRA. This is because the IRAs share contribution limits and you can contribute up to a total of $4,000 in 2006 and 2007 to all IRA accounts. For example, if you contribute $1,000 to a Roth IRA then you only have $3,000 left to contribute to a Traditional IRA.

Now, the SEP-IRA behaves just like a Traditional IRA to an employee. But from an employer perspective, there is no contribution limit, even if the employer and the employee is the same person (often the case with self-employment). If you can contribute $10,000 to the SEP-IRA as an employer, you can still contribute $4,000 to it (or any other IRA) as an employee.

Now, back to your specific scenario. If you’ve contributed to a SEP-IRA as an employer, you can still contribute to it or a Roth IRA as an employee up to $4,000. If you then contributed to the SEP-IRA as an employee or another Traditional IRA, then you would deduct it on your taxes. If you contributed to your Roth IRA, you would never deduct it on your taxes.

If you contributed to the SEP-IRA as an employee, your annual contribution limit would be lowered and so you would need to be careful about how much you contribute to a Roth or Traditional because of the limit sharing explained above.

As you can see, the SEP-IRA has nothing to do with the deductibility of the contribution to any IRA, the IRA itself governs that. However, your contributions to your SEP-IRA do affect how much you can contribute to your other IRAs.

Hopefully I got this right, anyone else have any input?

{ 6 comments, please add your thoughts now! }

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6 Responses to “SEP-IRA and IRA Contribution Limits”

  1. Jesse says:

    That sounds right to me. The joys of the SEP come when you’re the employer & employee, that’s for sure.

  2. Robin says:

    I found that a solo/self employed 401 k is better than a SEP. It allows for a salary deferral of up to $15.5 k for 2007 and a 25% profit sharing contribution.

  3. Cameron says:

    Contributions to a SEP (or Traditional) IRA don’t affect how much you can contribute to a Roth IRA. You can max both out.

    For self-employed, SEP IRA’s are a bit more convenient than simple 401(k)’s. They also allow higher contributions for people that make more, because contribution limits are based on income (25% of earnings up to $46,000 for 2009).

    Being self-employed, you want to max out a Roth first in years that business isn’t booming so much, but in good years, start hiking up the SEP contributions to write off that income to avoid the high tax brackets.

    • Eddie says:

      Just FYI, I know this article above is old but anyone reading needs to know that contributions to a Traditional IRA DOES affect how much you can contribute to a Roth IRA. In 2011 its $6000 TOTAL for ALL IRA accounts. If you contribute $2,000 to your traditional IRA, you can only contribute $4,000 to your Roth.

      • Anonymous says:

        in 2010 and 2011 if your Adj Gross Income is over 66k you can’t be a participant in a corporate retirement plan and take a tax deduction for a contribution to a traditional IRA,.You can contribute to a Roth though.

  4. Mary says:

    why would you even attempt to answer this question when you don’t have all the facts and clearly arent a tax professional.

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