Can You Contribute to a SEP and Traditional IRA at the Same Time?

For individuals planning their retirement savings, understanding the nuances of different account types is essential. A common question is whether one can contribute to both a Simplified Employee Pension (SEP) IRA and a Traditional IRA in the same year. Making informed decisions can maximize tax benefits and ensure compliance with IRS regulations.

Eligibility for Both Types of Accounts

To contribute to both a SEP IRA and a Traditional IRA, it’s important to meet the IRS criteria. A SEP IRA is designed for self-employed individuals and small business owners, allowing contributions on behalf of employees. Eligible participants must have earned income from self-employment or be an employer. Employees must be at least 21, have worked for the employer in three of the last five years, and earned at least $750 in 2024.

A Traditional IRA is available to anyone with earned income, such as wages, salaries, or tips. For 2024, individuals under 50 can contribute up to $6,500, with a $1,000 catch-up contribution for those 50 and older. This account is accessible to a broader audience, including those employed by others or self-employed.

For self-employed individuals, contributing to both accounts can increase retirement savings. While the SEP IRA allows substantial contributions based on income, the Traditional IRA offers a fixed limit. However, participating in a SEP IRA may affect the deductibility of Traditional IRA contributions.

Combined Contribution Regulations

The IRS allows contributions to both a SEP IRA and a Traditional IRA in the same tax year, but limits apply. For a SEP IRA, contributions can reach up to 25% of an employee’s compensation, capped at $66,000 for 2024. This is especially valuable for self-employed individuals who contribute as both employer and employee.

Traditional IRA contributions are limited to $6,500 for those under 50, with an additional $1,000 allowed for those over 50. These contributions are made on a post-tax basis, which can affect tax deductibility. Participation in a SEP IRA may reduce or eliminate the deductibility of Traditional IRA contributions, shaping an individual’s overall tax strategy.

Tax Deductibility Implications

The tax deductibility of SEP and Traditional IRA contributions has a significant impact on retirement planning. SEP IRA contributions are generally tax-deductible as a business expense, which lowers taxable income. This deduction is particularly beneficial for self-employed individuals as it reduces their adjusted gross income (AGI).

Traditional IRA deductibility depends on income thresholds, especially if the contributor also participates in a SEP IRA. For 2024, single taxpayers with a modified adjusted gross income (MAGI) of $73,000 or less can claim a full deduction. The deduction phases out between $73,000 and $83,000 and is unavailable for MAGI above $83,000.

Penalties for Excess Contributions

Exceeding contribution limits for SEP and Traditional IRAs triggers a 6% excise tax on the excess amount. This tax is applied annually until the excess is corrected. To avoid penalties, taxpayers should withdraw the surplus and any associated earnings by the tax filing deadline, including extensions. Failure to address excess contributions results in ongoing penalties.

Recordkeeping Essentials

Accurate recordkeeping is critical when managing SEP and Traditional IRAs, particularly when contributing to both. Proper documentation ensures compliance with IRS regulations and simplifies verification of contributions and deductions. Taxpayers should retain records such as Form 5498, which reports IRA contributions, and Form 1099-R, which details distributions, for at least three years after filing the applicable tax return.

For SEP IRAs, additional documentation may include the SEP plan document, employee eligibility determinations, and contribution calculations. Employers must retain proof of contributions made on behalf of employees. For Traditional IRAs, taxpayers should track nondeductible contributions using IRS Form 8606 to establish the account’s tax basis. Maintaining accurate records helps prevent overpayment of taxes on distributions and supports claims during audits.