SEP versus Traditional IRA

[Steve0116]

I am retired and have a very small business, so I set up a SEP.  The allowable SEP deduction is about $2500.  Does this really disqualify me from a standard maximum IRA deduction of $8K?   I thought I could take both, but it seems that any contribution to a SEP is considered to be "covered by a retirement plan at work".   It seems I should close the SEP completely and just take the traditional IRA deduction.

[MinhT1]

Being covered by a retirement plan at work does not necessarily prevent you from making a deductible IRA contribution.

Your eligibility to a deductible IRA contribution depends on your filing status and your modified Adjusted Gross Income (MAGI).

For example, if you file Single and your MAGI is $77,000 or less, you are entitled to a full deduction of your IRA contribution.

Please read this IRS document for more information.

[Steve0116]

Thanks for the reply, but my income is above the MAGI max, so it seems I need to eliminate the SEP so my wife and I can both take the max traditional IRA deduction.

[Anonymous]

This is exactly my question. The limit on deductibility of a traditional IRA being related to income applies ONLY if you have "a retirement plan at work". IRS pub 590 indicates that you know if you have an IRA at work when your W2 shows the box checked by "retirement plan". My situation (and the original poster's situation) is that we are SELF EMPLOYED and have set up an SEP IRA. Thus our contributions to our SEP IRA should not constitute having "a retirement plan at work" as defined by the IRS. Thus, my view is that regardless of our income, we should be able to make a maximized SEP IRA contribution based on the amount of our self employment earnings PLUS make a fully deductible IRA contribution ($8000 for me and my spouse) in spite of having a high income. Yet turbotax says that the traditional IRA contribution is NOT DEDUCTIBLE if I make an SEP IRA contribution for the same tax year. It interprets the contribution to the SEP IRA as "having a retirement plan at work". If I delete my SEP IRA contribution for that tax year, it allows full deductibility for the traditional IRA. I think this is wrong and that since I do not have an employer sponsored retirement plan, I should be able to make a full SEP IRA contribution AND and fully deductible traditional IRA contribution for the same tax year. Please will an expert comment on this situation which is NOT COVERED at all in the IRS pub 590.

[SusanY1]

A Simplified Employee Pension or "SEP" plan is an employer-sponsored plan, and as such does constitute covered at work for purposes of making deductible traditional IRA contributions.  

Pub 590 does address the definition of a SEP which is "a plan that allows your employer to make contributions".  When you make a contribution to the SEP, you are doing so as the employer not the employee.  This makes it a plan that covers you "at work".  

It just so happens in this case, that you are also your employer.  

You can still make your traditional IRA contribution, but your ability to deduct that contribution may be limited.  For some IRS guidance on this issue, see the SEP Plan Fix-It-Guide.

@Anonymous 

[Anonymous]

Ok, thanks for that. If I have made SEP IRA contributions in the past can I elect NOT to contribute to my SEP IRA this year (2024) so I can make fully deductible traditional IRA contributions for 2024? In my case, that would result in a larger deductible contribution.

[ThomasM125]

Technically, if you have a SEP plan at work but choose not to contribute to it, then you still have a employer plan. If you are self-employed, you can just stop contributing to it and consider it closed. However, if you have other employees that contribute to it, you would have to suspend the plan for everyone since you would be allowed to contribute to it even if you chose not to, and that would mean you have an employer plan.

[Anonymous]

Thanks. I have no employees so could consider it closed for 2024. If in a future year I would have better deductibility by contributing to the SEP IRA rather than the traditional, can I just open it back up by contributing to the SEP? Stated another way, can I decide whether to contribute to one or the other based on what would be the most advantageous in terms of deductibility of the contribution? I’ve learned I can’t contribute to both in a given year because my income is too high and would eliminate the deductibility of the traditional IRA if I contribute to the SEP.

[SusanY1]

Yes, you can choose in future years to contribute to the SEP and in those years you'd again be "covered by an employer plan".