Should you Make SEP IRA Contributions as an Employer or Individual?

If you have self-employment income, SEP IRAs (SEP stands for “Simplified Employee Pension”) are a great vehicle for turbo-charging your retirement savings while simultaneously reducing your tax obligation. Along with Solo 401Ks, they are among the 2 best self-employed retirement account options. The only downside to SEP IRAs is that they aren’t the most intuitive. But don’t let that dissuade you – becoming familiar with a few basics goes a long ways.

One of the biggest SEP IRA basics that you should learn is around the classification of contributions. When you make a contribution to a SEP IRA that you manage, you have the option to contribute as an “employer” or an “individual”. That prompted a 20somethingfinance reader to recently ask me the following question.

When contributing to my SEP IRA, I noticed the option to contribute as an employer and an individual. That left me wondering, should you contribute as an employer or an individual to a SEP IRA?

This is kind of a tricky one!

Contributing to a SEP IRA as an Employer Versus Individual

See the screenshot from my Vanguard account here to see exactly what the reader is talking about.

SEP IRA employer vs individual contribution

On the surface, this is confusing (and the IRS does not cover this well on their site), but the short answer to the question is, you can contribute to a SEP IRA both as an employer and an individual (with some caveats).

As a self-employed individual (e.g. a contractor, fully self-employed, or someone who earns a side-income), think of a SEP IRA as a Traditional IRA with the added ability to contribute additional funds as the “employer” of yourself. Once you understand that, it makes things easier.

If contributing as an “employer”, with self-employment income, you can contribute the lesser of:

  • 25% of your self-employed compensation, or
  • the maximum employer contribution: $66,000 in 2023 or $69,000 in 2024. Note that there are no “catch-up” contributions for SEP IRA employer contributions as there are for employer-sponsored retirement accounts.

I won’t go into all of the details in this post, but the tax deductible amount is less than 25% (maximum of 20%) and requires a bit of calculation. I have a list of SEP IRA calculators here, or check out IRS IRS Publication 560 if you want to find out more.

If contributing as an “individual”, the standard maximum IRA contributions combined for all of your Traditional, Roth, and SEP IRAs are capped at $6,500 for 2023 and $7,000 for 2024 (aside from the additional $1,000 catch-up contribution if age 50+).

It makes sense to make the full “employer” contribution before even considering the separate “individual” contribution. But, there is nothing stopping you from contributing to a SEP IRA both as an “employer” and an “individual” – you just want to make sure that, similar to a Traditional IRA, you are under the IRA income limits to be able to deduct contributions for the “individual” contribution, since technically a SEP IRA is an employer retirement plan (similar to a 401K, 403B, etc.).

Combined, this can add up to a lot of retirement savings and tax deductions.

If you have a SEP IRA (or are interested in one), you may also want to look into the Solo 401K, as they can offer even more retirement and tax savings.

Also, if you have a SEP IRA run by an employer other than yourself, you cannot contribute as an “employee” like you can with a 401K, for example. However, if your plan allows it, you can contribute as an “individual”, as you would through a Traditional IRA.

Note: the IRA contribution deadline is the tax deadline for that calendar year!

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