Can I Contribute Self-Employment & Employee Contributions to the Same IRA?
Original post by Craig Woodman of Demand Media
A self-employed person enjoys an independence that employees do not experience. In exchange for this, he must fund all of his employee benefits, such as health insurance and pension plans, on his own. To make up for this, the IRS allows self-employed people more choices to set up pension plans than employed individuals. Often, the business owner may make contributions to the plan as both the employer and employee.
A simplified employee pension (SEP) plan is set up by an employer for his employees, and also for himself. The employer can deposit up to the lesser of 25 percent of the employee's salary or $49,000 in any one year, as of the time of publication. A self-employed person contributes the employer's portion on his own behalf. The employee, or self-employed person, may contribute to this account as if it were his own IRA account, up to the IRA contribution limits of $5,000 per year, or $6,000 per year if over age 50.
A savings incentive match plan for employees (SIMPLE) IRA can be set up by employers with under 100 employees. The employee may contribute up to $11,500 per year, or $14,500 if over age 50 as of the time of publication, and the employer must either match the employee contribution up to 3 percent of his salary, or contribute 2 percent to each employee's account regardless of the employee's participation. According to the rules for SIMPLE plans, employees include self-employed people, who may make contributions as employees and contribute as the employer as well.
A traditional IRA allows you to save for retirement outside of any employer plan. Where most traditional IRA plans are individual plans, you can contribute to them as allowed by the IRS guidelines. Employers do not contribute directly to traditional IRA accounts. If you meet the IRS standards, your contributions to a traditional IRA may be tax deductible, and will grow tax deferred until you withdraw the money at retirement.
The Roth IRA is a powerful savings tool that allows contributions to grow tax free. A Roth IRA does not allow the contributor to take an immediate tax benefit like other IRA accounts. However, at retirement age, all withdrawals from a Roth IRA are tax-free. A Roth, like a traditional IRA, is an individual account. A self-employed person can contribute to a Roth if he meets the IRS guidelines, but he does not receive any increased benefit from the Roth due to his self-employment status.
- IRS.gov: Retirement Plan FAQs Regarding SEPs
- IRS.gov: Retirement Plan FAQs Regarding SIMPLE IRA Plans
- CNN Money; A New Way to Save Tax Free; Janice Revell; May 2011
About the Author
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.