The Internal Revenue Service (IRS) allows a person whose employer funds a SEP-IRA on his behalf to contribute to either a traditional IRA or a Roth IRA outside of his workplace. Because an employee cannot contribute to his employer-sponsored, non-qualified SEP-IRA, contributions made to an individual's SEP-IRA account by his employer do not count against the amount the worker may deposit in his traditional IRA during a given tax year.
The IRS allows an employer to determine the standards that make an employee eligible to benefit from its SEP-IRA plan within guidelines identified by the IRS. The maximum eligibility requirements an employer can include in its SEP-IRA plan document include a minimum age of 21 for participation in the plan and a work history that includes compensation paid to the employee by the company sponsoring the SEP-IRA during at least three of the five years preceding the person's enrollment in the retirement plan. The IRS allows an employer to exclude certain employees from eligibility including those who earn less than a certain amount, currently $550, during a year, and also-- union employees and non-resident aliens.
The IRS allows only a worker's employer to contribute to the worker's SEP-IRA account. All contributions made into a worker's account vest immediately, meaning contributions become the property of an employee when his employer deposits funds in his SEP-IRA. As of publication, an employer may contribute the lesser of 25 percent of an employee's compensation or $49,000 into the employee's SEP-IRA account. The IRS allows an employer to deduct its aggregate annual SEP-IRA contributions from its federal taxes in an amount equaling up to 25 percent of the employer's eligible payroll.
Traditional IRA Eligibility
In general, the IRS considers a taxpayer who records earned income on his federal tax return eligible to fund either a traditional IRA or a Roth IRA. If a person's modified adjusted gross income (MAGI) is above certain thresholds identified by the IRS, the IRS limits or eliminates his ability to contribute to an IRA outside of his workplace. If a married person who files a joint tax return records a MAGI under $169,000, for instance, the IRS allows him to contribute the maximum permissible amount to his IRA as of publication. If, on the other hand, the taxpayer reports a MAGI of $179,000 or greater, the IRS does not allow him to make a contribution to an IRA outside of his workplace. The IRS limits the amount a person reporting a MAGI between $169,000 and $179,000 may contribute to his IRA.
Traditional IRA Contributions
In the current tax year, the IRS allows a worker under 50 years old to contribute up to $5,000 to his IRA regardless of the amount his employer deposits in his SEP-IRA. The IRS permits workers 50 or above to deposit up to $6,000 in their traditional or Roth IRAs. The IRS allows a taxpayer to deduct his contributions to a traditional IRA on his federal tax return.
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