SEP IRA Contribution Question: AJ Answered

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SEP IRA contribution dilemma

DFA reader AJ asked:

Hi, Matt – Just a quick question (I think.) I am a self-employed contractor receiving a 1099 from my contracting company where I provide marketing services. This represents 100% of my income. I have an SEP IRA which I contribute to. Do I set it up to contribute to my SEP IRA as an employee or an employer? Does it matter?

SEP IRA contributions as employee or employer?

If you are looking for more a more in depth information on this topic check out our article on SEP IRA contribution limits and deadlines.  If you’re considering a 401k, be sure to consider current 401k contribution limits.

When I received this question from AJ I immediately emailed her back to ask a few questions that needed to be cleared up.  Here is the conversation that ensued and what we came up with as an answer:

Me to AJ: Hi AJ, who is asking you to differentiate between your status as an employee or an employer?  Are you filling out a tax form that asks this info?  Are you being asked by a brokerage firm to supply this info?

AJ to Me: Hi Matt, when going in to make the contribution with my brokerage firm, the firm asked me whether it was an employee, employer, or individual contribution.  I actually talked to someone at the brokerage firm and they said that when you contribute as an individual it’s like contributing $5K to any type of IRA.  And that contributing as an employee only applies to SAR/SEP IRAs and so the answer is that I should contribute as an employer.  Hopefully that is in line with what you thought as well.  Thanks.

Me to AJ: Right, that makes sense… but remember that when you make employer contributions, you must also make contributions to the SEP of all eligible employees.  If you’re the only employee (Sole Proprietor) then it doesn’t matter.

AJ to Me: Yes, right.  Luckily, it’s just me!  Thanks for responding.  Hopefully this will help others.

In summary…

AJ is a sole proprietor so she must contribute as an employer.  This is also correct if the business had employees and business income, but if she did have employees she would need to contribute to the SEP IRA of all employees along with her own.  As I understand it, her brokerage firm was looking to decipher whether or not AJ’s business had employees.

Do you have an SEP IRA?

Is there any other advice you would give to AJ other than to keep saving?  🙂

Have a question of your own?  Ask Matt Jabs for free!  🙂

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1 Debt Free Dude

And don’t forget that you can start rolling traditional IRAs over to Roth IRA if that fits better with your long term financial plan. As far as I know, there isn’t a way you can contribute directly to a Roth IRA from the employer side of things.

2 Mrs. Money

I love when older people come in and ask to take money out of their “Ira.” They don’t say I.R.A., they say it like it’s a person.

I hadn’t done much research about SEP IRAs. I think I’ll stick with my 401k. Too much to keep track of otherwise. 😉

3 Bonnie

Huh? ALL SEP-IRA contributions are employer contributions. There are no employee contributions. Is AJ sure she doesn’t have a Solo 401k? Maybe her brokerage was asking her whether she has employees for whom she needs to make a contribution. This post doesn’t make sense.

4 Matt Jabs

After rereading the post I can see how the wording was confusing… I changed the last paragraph to be more clear. Thank you for pointing it out Bonnie.

5 Margaret

This year my employer decided to give us a bonus instead of making a SEP IRA contribution. He said this was on the advice of his accountant. Obviously it would have been to my advantage to have as this money would have grown tax deferred in my SEP IRA. What is the tax advantage to my employer?

6 RL

I own an LLC and am the sole owner of the LLC however both my wife and I do the work and we are the only two that work in this LLC. My LLC does not make salary or 1099 payments to either of us. My question is if my LLC can contribute to an SEP for both me and my wife separately ? If the answer is yes then how would the contribution be calculated since there is no direct salary or 1099 payments made?

7 David Bloss

I have the exact same situation and was wondering if you ever got your question answered. Please let me know. Thanks.

8 WillD

This article correctly states “when you make employer contributions, you must also make contributions to the SEP of all eligible employees.”

But is the opposite true? If an employer makes contributions to all eligible employees, must he also make employer contributions?

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