Can I Have an IRA & a SEP Account?

by Leslie McClintock

Individual retirement accounts, or IRAs, and simplified employee pension plans, or SEPs, are distinct retirement savings programs, but they are interrelated. There is no law or guideline that says you cannot contribute to an IRA if you are also covered by a SEP. But just being covered by a SEP may affect your ability to make deductible contributions to an IRA.

IRA Basics

Generally, taxpayers can contribute up to $5,000 to IRAs in any given year. Those over age 60 can contribute an additional $1,000. There are two basic varieties of IRAs: Traditional IRAs allow taxpayers whose income falls below certain limits to deduct contributions in the year in which they are made. The money grows tax-deferred, and is taxable as income in retirement. The law sets a lower income threshold for eligibility to make deductible contributions for those who are covered by a workplace retirement plan than for those without access to such a plan. Roth IRAs do not allow for a current year tax deduction on contributions, but growth is tax free, and there is no tax on income taken from the account.

SEP Basics

The SEP is a type of simplified defined contribution pension plan that is popular among small business owners because in most circumstances it allows them to shelter more income from taxes than an IRA or a 401k. Plan rules allow business owners to deduct up to $49,000 in income, up to 25 percent of employee income or 20 percent of net self-employment income in a SEP plan. Assets in a SEP receive similar tax treatment to traditional IRA accounts and these assets also enjoy significant asset protection benefits as well.

IRA Income Limitations

Congress capped the income at which people could make deductible contributions to IRAs because they did not want the bulk of the benefits of the tax advantages in IRS to accrue to high-income taxpayers and business owners. As of publication, single taxpayers covered by a retirement plan at work can deduct the full IRA contribution allowance if their income falls below $56,000 per year. Your allowable tax deductible contributions fall gradually until your income reaches $66,000 per year, at which point you cannot deduct IRA contributions. You can, however, make nondeductible contributions. For married couples covered by a retirement plan at work, your limits are $110,000 and $120,000, respectively.

Rules for Taxpayers Not Covered by a Retirement Plan at Work

If you are not covered by a SEP, SIMPLE, 401k, Keogh, 403b or defined benefit pension plan at work, you have a wider eligibility window to make deductible contributions to an IRA. Specifically, you can deduct your IRA contribution at any income level. Married couples can make fully deductible contributions up to an income level of $169,000. Deductible contribution eligibility gradually increases after that point and reaches zero when the married couple's joint income reaches $179,000, as of 2011. All deductions to IRAs above that income level are non-deductible.

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