topic SEP IRA Employer Contributions as Sole Propietor in Retirement tax questions

SEP IRA Employer Contributions as Sole Propietor

winnc — Tue, 04 Feb 2020 02:10:18 GMT

How does a SEP IRA contribution get designated as an Employer contribution? I am a sole proprietor, and I'm hoping that I'm still able to have employer contributions because those contributions (vs elective employee contributions) do not affect FAFSA (Financial Aid calculations for college).

Re: SEP IRA Employer Contributions as Sole Propietor

KurtL1 — Tue, 04 Feb 2020 04:18:30 GMT

A simplified employee pension (SEP IRA) is a retirement plan that an employer or self-employed individuals can establish. The employer is allowed a tax deduction for contributions made to the SEP plan and makes contributions to each eligible employee's SEP IRA on a discretionary basis.

Then, the IRS outlines three steps for setting up your SEP IRA:

Create a formal written agreement. You can do this with IRS Form 5305-SEP or through your account provider.
Give eligible employees information about the SEP IRA. ...
Set up separate SEP IRAs for each eligible employee with the account provider.

To set up a SEP IRA on TurboTax you should:

Enter SEP IRA contribution in the Search Magnifying Glass
Select Jump to sep ira contribution

Answer the questions on the pages

Re: SEP IRA Employer Contributions as Sole Propietor

dmertz — Tue, 04 Feb 2020 04:45:56 GMT

Except in the case of a SARSEP established before 1997, all SEP contributions are employer contributions, not employee salary deferrals. However, I have no knowledge as to how FAFSA treats SEP contributions

Re: SEP IRA Employer Contributions as Sole Propietor

winnc — Tue, 04 Feb 2020 18:37:07 GMT

Thank you for your response. However, my question wasn't about what a SEP is or how to make contributions (I've used one for several years), but rather the specific question of how contributions are marked as Employer contributions rather than Employee contributions. Any knowledge around that?

Re: SEP IRA Employer Contributions as Sole Propietor

dmertz — Tue, 04 Feb 2020 18:41:22 GMT

I assume that you are replying to KurtL1's post and you didn't see my answer that addresses exactly the question asked. SEP contributions are employer contributions.

Re: SEP IRA Employer Contributions as Sole Propietor

winnc — Tue, 04 Feb 2020 19:56:17 GMT

You're definitely getting to my question, thanks. However, are you sure this is right? I've read a number of places where it refers to the different rules around both employer contributions and employee contributions (as part of a salary deferral arrangement). For instance, Schwab's application for setting up elective employee deferrals: https://www.schwab.com/public/file/P-968190/REG13284-15-ST.pdf

For FAFSA, employer contributions are not included, but elective employee contributions are -- and this is what makes the SEP so confusing. I've seen no help (on TurboTax or anywhere) about how you distinguish between an employer contribution and an employee contribution when, as a sole proprietor, you are both.

Re: SEP IRA Employer Contributions as Sole Propietor

winnc — Tue, 04 Feb 2020 19:21:20 GMT

Yes, that's right -- I replied to his first, then yours second. However, apparently this board just puts messages in order, regardless of which "reply" button you hit (that's awkward and annoying). And I replied to your reply : )

Re: SEP IRA Employer Contributions as Sole Propietor

dmertz — Tue, 04 Feb 2020 21:31:10 GMT

Read Schwab's document again and you'll see that elective deferrals apply only to a SARSEP. A SARSEP is a grandfathered type of plan that is not permitted to be established after 1996.

Re: SEP IRA Employer Contributions as Sole Propietor

winnc — Wed, 05 Feb 2020 03:31:23 GMT

You're absolutely right. I totally missed that.

So...apparently "employee contributions" (I'm discovering) refer to separate "normal" IRA contributions that an employee may make into the same IRA account that receives the SEP funds.

Thanks.

Re: SEP IRA Employer Contributions as Sole Propietor

dmertz — Wed, 05 Feb 2020 03:46:54 GMT

I'm not sure where you are seeing reference to "employee contributions." Other types of plans (e.g., 401(k), 403(b), 457(b), federal TSP, SIMPLE IRA, SIMPLE 401(k)) permit employee elective salary deferrals, but a SEP plan does not (unless it is a SARSEP established before 1997).

Re: SEP IRA Employer Contributions as Sole Propietor

winnc — Wed, 05 Feb 2020 19:50:42 GMT

The wording "employee contributions" may be confusing in this case. However, employees may be allowed to make their own contributions into their SEP, effectively using the SEP as they would a Traditional IRA. I've confirmed this with multiple sources, including this morning in conversation with a retirement specialists at Schwab. Here's the precise wording from Vanguard:

Employee contribution limits

Employees may be able to make traditional IRA contributions to the SEP-IRA of up to $5,500 for the 2018 tax year (or $6,500 if age 50 or older) and up to $6,000 ($7,000 for employees age 50 or older) for the 2019 tax year.
This amount is the total contribution allowed by the IRS that employees can make to all their IRAs (SEP, traditional, or Roth) each year.

(https://investor.vanguard.com/small-business-retirement-plans/sep-ira)

Re: SEP IRA Employer Contributions as Sole Propietor

dmertz — Wed, 05 Feb 2020 20:34:51 GMT

OK, I see. Yes, some SEP-IRA custodians allow regular traditional IRA contributions to a SEP-IRA account and some do not. These two types of contributions are reported differently on Forms 5498, so to keep the reporting obvious some custodians simply prohibit regular traditional IRA contributions from being made to a SEP-IRA. My own suggestion is to make SEP and non-SEP contributions to different IRAs for exactly this reason, since doing so makes it difficult for the custodian to mistake one type of contribution to another.

Re: SEP IRA Employer Contributions as Sole Propietor

winnc — Wed, 05 Feb 2020 21:00:32 GMT

Sure, that's good advice.