Can I Deduct an IRA if I Have a SEP?

by Cindy Quarters

A simplified employee pension (SEP) individual retirement account (IRA) is set up by an employer, and is intended to provide pension benefits for employees when they retire. It is set up as an incentive to employees, and it must provide benefits to all eligible employees. A business owner will often seek the help of a financial institution when setting up a SEP plan.


A SEP IRA is designed to receive contributions from an employer as a means of creating pension plans for the employees. All funds in a SEP are employer funds as employees do not contribute to a SEP. Money placed in a SEP IRA is not counted as part of an employee’s income until an employee begins to receive distribution of the funds. Normally the money remains in the SEP IRA until the employee reaches the age of 59 1/2 years, after which payments can start.

SEP Deductions

If you are an employee with a SEP IRA, you are not eligible to take any tax deductions related to the SEP. This is because all of the money in a SEP has been placed there by your employer. If you are an employer who contributes to SEP IRAs for your employees, you can take your contributions as a deduction, provided you observe the IRS limits. As of 2011, you are allowed to either deduct the amount you actually contributed, or a maximum of $49,000 per employee.

Self Employed

If you are self-employed, you can set up a SEP IRA for yourself and fund it from your business earnings. Contributions to a SEP are the same as contributions for employees, with a cap of 25 percent or $49,000 annually, although you may be required to use a lower figure in some cases. You are allowed to contribute only if you have net earnings from your business, and you must use the self-employed worksheet and rate table provided by the IRS to determine what your contribution level is.

Excess Contributions

If you inadvertently make excess contributions to one or more SEP IRA accounts, you can carry over the amount of the contribution to later years. All deductions are limited to the allowable amount for deductions for the year in which the contribution is claimed. This can be either a calendar year or the fiscal year, depending on the accounting method that you use. Excess SEP IRA contributions may also be subject to a 10 percent excise tax.

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