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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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