SEP IRA

Submitted by Brandon Blanchard on Mon, 2023-09-25 16:06

Hi,

I have several clients that work for one company. They are all w2 employees. The employer has setup SEP IRA funding for the employees and each month the employer sends me checks to add to their SEP IRAs at my firm. The mailing from the employer includes several checks and it has checks to be coded as employee IRA contribution and some to be coded as employer contributions. Is this allowable or doesn’t even make sense? I typically see employers (with w2 employees) utilize a 401(k) or SIMPLE IRA plan. I have never seen them use a SEP IRA. Typically I only see SEP IRAs for those that are self-employed or 1099. Am I missing something?



Submitted by Alan - IRA critic on Mon, 2023-09-25 16:52

Yes, a SEP IRA is allowed to receive both SEP (employer) contributions and non SEP IRA (personal IRA) contributions. All eligible employees for the employer must receive SEP contributions per the eligibility requirements chosen on the 5305 SEP form. However, the 5498 coding is quite different because SEP contributions must be reported in the year they are actually made, while personal IRA Contributions are reported for the year they are assigned to and from 1/1 to 4/15 personal contributions can be made for either the prior year or the current year. As such, this arrangement risks coding errors for the contributions and miscommunication between the employer and employees. It would be advisable and less error prone to simply let the employees handle their own personal IRA (or Roth IRA) contributions and make them to separate TIRA or Roth IRA accounts.

Submitted by Brandon Blanchard on Mon, 2023-09-25 17:40

Hi, Thanks for clarifying this. So let’s say that $6,000 goes into the SEP for tax year 2023. $3,000 of this is employer contributions and $3,000 of this is personal IRA contributions. Does the taxpayer have to deduct their $3,000 personal IRA contributions on their tax return (schedule 1, part 2, line 20)? I assume their personal IRA contribution are not netted out on their w2, correct? 

Submitted by Alan - IRA critic on Mon, 2023-09-25 18:38

Neither the SEP or personal contributions are reported on the W-2, but the employee must report personal (TIRA) contributions on Form 1040, including the deduction and if not deductible on Form 8606. The SEP contributions bring into play the income limits for traditional IRA deduction. Employees whose incomes are too high for the deduction should consider Roth IRA contributions as those have a higher modified AGI limit before phasing out. 

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