SEP-IRA and its relationship to other IRAs

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Topic Author
LiterallyIronic
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SEP-IRA and its relationship to other IRAs

Post by LiterallyIronic » Fri Nov 08, 2019 10:32 am

So, my brother's employer offers a SEP-IRA instead of a 401k. He tells me that his employer puts money into his SEP-IRA, to the tune of 20% of his income. That is to say, he gets "paid" 20% more than his actual salary, but that 20% goes directly in the SEP-IRA.

My brother was complaining yesterday that he doesn't have a lot of other places to invest besides SEP-IRA. For example, I max two Roth IRAs (one for me and one for my wife) and I put money into my 401k. He was saying that he can also contribute money into his SEP-IRA, but he's limited to $5,500/year.

The problem is that he doesn't know what he doesn't know. The way he explains what he's been doing is "putting $5,500 into the SEP-IRA and putting the rest into a 'personal investment account' at Vanguard." I assume that is a taxable account, but all he knew is that he goes to Vanguard's website and clicks on Personal Investor. He stated that there are no rules on when he can take the money back out, so that's why I assumed it was a taxable account. I asked him if he knew if withdrawals would be hit with capital gains tax, but he just said he's never taken any out so he doesn't know.

Looking into the IRS page about SEP-IRAs here: https://www.irs.gov/retirement-plans/re ... tributions, it looks like the contribution limit is 25% of income or $56,000, whichever is less. I originally assumed that he was doing $5,500 because he didn't know that IRA contribution limits had changed to $6,000. But it doesn't sound like that is relevant to the SEP-IRA. That being said, the $5,500 amount seems weird, too. If his employer is putting in 20%, then he could put in up to 5% in order to reach the 25% limit, but if $5,500 is 5% of his income, then he's making $110,000, which isn't completely out of the realm of possibility, but it would blow my mind - based on his education and experience, I would guess he makes in the $60k range. But I don't know.

It seems like his contributions to the SEP-IRA count against the annual IRA contribution limits, but perhaps he could at least do $5,500 into the SEP-IRA and $500 into a Roth (or Traditional) IRA.

He jokingly accused me of "double-dipping" by investing in a Roth IRA and a 401k, but I'm trying to see if there is a way for him to invest more money without having to resort to a taxable account (assuming that's what he's actually doing).

Any ideas or insight would be appreciated.

niceguy7376
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Re: SEP-IRA and its relationship to other IRAs

Post by niceguy7376 » Fri Nov 08, 2019 10:38 am

SEP IRA is an EmployER contribution plan only. EmployEE cannot contribute to that plan.

In SEP IRA, EmployER needs to decide on a % and apply the % too each employee salary and contribute that plan to the Employee accounts. EmployER cannot say 5% to certain employees and 10% to owners and such.

So for your brother, since he is an EmployEE, the EmployER is contributing to your brother account.
Your brother can contribute to IRA account (Trad or Roth depends on the IRS limits based on income and having a retirement plan at work) separately on their own and can do a brokerage taxable account.

Not knowing what your brother is making, we dont know if he feels it better to have a SEP IRA or 401k.

HomeStretch
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Re: SEP-IRA and its relationship to other IRAs

Post by HomeStretch » Fri Nov 08, 2019 10:54 am

If brother is contributing $5,500 via payroll deduction, he may be making Traditional IRA contributions to the SEP IRA or may be contributing to a separate tIRA or rIRA via payroll deduction. Providers set up the latter as a “benefit” but it often is for a higher-fee IRA account than available from low-cost providers like Fidelity, Vanguard, etc.

You can suggest (if brother has asked for advice/help) that brother clarify exactly what he is contributing $5,500 to and the plan costs. He can transfer the account, if high fee, to a low-cost provider and contribute directly rather than through payroll. Also mention he can contribute $6,000 to a tIRA or rIRA for 2019.

ETA to revise first paragraph to reflect brother may be contributing to SEP IRA.
Last edited by HomeStretch on Fri Nov 08, 2019 12:54 pm, edited 1 time in total.

retiredjg
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Re: SEP-IRA and its relationship to other IRAs

Post by retiredjg » Fri Nov 08, 2019 11:11 am

Agree with the others - contributions to a SEP IRA are done by the employer, not the employee. The employer decides how much (subject to IRS limits).

Your brother may be contributing to a traditional IRA or Roth IRA through payroll deduction - thinking that is going into the SEP IRA, but it is not. (see clarification in IRS link several posts below - the money might be going into the SEP, but it is not a SEP contribution). A possible exception might be something called a "deemed IRA" which I've heard of but never seen and I'm not even sure that can be done with a SEP IRA.

If your brother is contributing to a traditional IRA or Roth IRA through payroll deductions, it might be into a poor plan (meaning a high cost plan). If so, he would want to continue saving in an IRA but move it to a good (low cost) provider.

It seems like his contributions to the SEP-IRA count against the annual IRA contribution limits, but perhaps he could at least do $5,500 into the SEP-IRA and $500 into a Roth (or Traditional) IRA.
The limits for SEP IRA are not affected by the limit for tIRA/Roth IRA. And vice versa.

He jokingly accused me of "double-dipping" by investing in a Roth IRA and a 401k, but I'm trying to see if there is a way for him to invest more money without having to resort to a taxable account (assuming that's what he's actually doing).
  • He has no control over how much goes into the SEP IRA.

    He can contribute to traditional and/or Roth IRA up to a total of $6k this year. More if over age 50.

    If he is using a high deductible health insurance policy, he might be able to contribute something to an HSA.

    If all those things are filled, a taxable account is likely his next option.

    Possible exception...if he has any self-employment income, he might be able to set up a one-participant 401k and save money in that.
Last edited by retiredjg on Sat Nov 09, 2019 8:44 am, edited 1 time in total.

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Wiggums
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Re: SEP-IRA and its relationship to other IRAs

Post by Wiggums » Fri Nov 08, 2019 11:22 am

I’d suggest that you ask him to review his benefits for all investment options. I was also thinking about the HSA but he may or may not have other options. If not, maybe Roth or backdoor IRA might make sense.

aristotelian
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Re: SEP-IRA and its relationship to other IRAs

Post by aristotelian » Fri Nov 08, 2019 11:46 am

HomeStretch wrote:
Fri Nov 08, 2019 10:54 am
If brother is contributing $5,500 via payroll deduction, he is likely contributing to either a traditional or Roth IRA (not the SEP-IRA). Providers set this up as a “benefit” but it often is for a higher-fee IRA account than available from low-cost providers like Fidelity, Vanguard, etc.
Why would you say that? SEP is a pretty common substitute for small businesses that don't want to administer a 401k. He does not have to be self employed to do SEP. If he thinks he has an SEP, I would assume that's what he has.

Topic Author
LiterallyIronic
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Re: SEP-IRA and its relationship to other IRAs

Post by LiterallyIronic » Fri Nov 08, 2019 12:09 pm

retiredjg wrote:
Fri Nov 08, 2019 11:11 am
Agree with the others - contributions to a SEP IRA are done by the employer, not the employee. The employer decides how much (subject to IRS limits).

Your brother may be contributing to a traditional IRA or Roth IRA through payroll deduction - thinking that is going into the SEP IRA, but it is not. A possible exception might be something called a "deemed IRA" which I've heard of but never seen and I'm not even sure that can be done with a SEP IRA.

If your brother is contributing to a traditional IRA or Roth IRA through payroll deductions, it might be into a poor plan (meaning a high cost plan). If so, he would want to continue saving in an IRA but move it to a good (low cost) provider.

It seems like his contributions to the SEP-IRA count against the annual IRA contribution limits, but perhaps he could at least do $5,500 into the SEP-IRA and $500 into a Roth (or Traditional) IRA.
The limits for SEP IRA are not affected by the limit for tIRA/Roth IRA. And vice versa.

He jokingly accused me of "double-dipping" by investing in a Roth IRA and a 401k, but I'm trying to see if there is a way for him to invest more money without having to resort to a taxable account (assuming that's what he's actually doing).
  • He has no control over how much goes into the SEP IRA.

    He can contribute to traditional and/or Roth IRA up to a total of $6k this year. More if over age 50.

    If he is using a high deductible health insurance policy, he might be able to contribute something to an HSA.

    If all those things are filled, a taxable account is likely his next option.

    Possible exception...if he has any self-employment income, he might be able to set up a one-participant 401k and save money in that.
This is some good info.

Also, he does have access to an HSA, but he tells me he contributes "like $50 to it because that's all that's allowed." I don't know if that $50 is per month or per year, but either way, that's less than the annual limit. Could it be possible that his employer is putting money into his HSA, lowering the amount remaining for him to contribute?

Admiral
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Re: SEP-IRA and its relationship to other IRAs

Post by Admiral » Fri Nov 08, 2019 12:20 pm

aristotelian wrote:
Fri Nov 08, 2019 11:46 am
HomeStretch wrote:
Fri Nov 08, 2019 10:54 am
If brother is contributing $5,500 via payroll deduction, he is likely contributing to either a traditional or Roth IRA (not the SEP-IRA). Providers set this up as a “benefit” but it often is for a higher-fee IRA account than available from low-cost providers like Fidelity, Vanguard, etc.
Why would you say that? SEP is a pretty common substitute for small businesses that don't want to administer a 401k. He does not have to be self employed to do SEP. If he thinks he has an SEP, I would assume that's what he has.
Because it's not his money, it's the employer's money, going into the SEP (he's an employee not the owner).
If there's a deduction, it may be that it's going to his IRA. It's hard to tell from the OP, though, it sounds like the employer may have ginned up his pay somehow (?) and then contributed that extra pay to the SEP (?). Not sure how that would be possible as the pay would be subject to taxation.
That is to say, he gets "paid" 20% more than his actual salary, but that 20% goes directly in the SEP-IRA.
This part is confusing.

Topic Author
LiterallyIronic
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Re: SEP-IRA and its relationship to other IRAs

Post by LiterallyIronic » Fri Nov 08, 2019 12:28 pm

Admiral wrote:
Fri Nov 08, 2019 12:20 pm
Because it's not his money, it's the employer's money, going into the SEP (he's an employee not the owner).
If there's a deduction, it may be that it's going to his IRA. It's hard to tell from the OP, though, it sounds like the employer may have ginned up his pay somehow (?) and then contributed that extra pay to the SEP (?). Not sure how that would be possible as the pay would be subject to taxation.
That is to say, he gets "paid" 20% more than his actual salary, but that 20% goes directly in the SEP-IRA.
This part is confusing.
Sorry, maybe I worded it poorly. For example, if his salary was $100,000, then his employer would be putting $20,000 into his SEP-IRA. I didn't want to use the word "match" because he doesn't have to put anything in (and it sounds like he can't put anything in) in order to get the 20%.

Admiral
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Re: SEP-IRA and its relationship to other IRAs

Post by Admiral » Fri Nov 08, 2019 12:36 pm

LiterallyIronic wrote:
Fri Nov 08, 2019 12:28 pm
Admiral wrote:
Fri Nov 08, 2019 12:20 pm
Because it's not his money, it's the employer's money, going into the SEP (he's an employee not the owner).
If there's a deduction, it may be that it's going to his IRA. It's hard to tell from the OP, though, it sounds like the employer may have ginned up his pay somehow (?) and then contributed that extra pay to the SEP (?). Not sure how that would be possible as the pay would be subject to taxation.
That is to say, he gets "paid" 20% more than his actual salary, but that 20% goes directly in the SEP-IRA.
This part is confusing.
Sorry, maybe I worded it poorly. For example, if his salary was $100,000, then his employer would be putting $20,000 into his SEP-IRA. I didn't want to use the word "match" because he doesn't have to put anything in (and it sounds like he can't put anything in) in order to get the 20%.
OK. I believe there are some SEP-IRA plans that do allow non-SEP IRA contributions by the employee. (Spirit Rider may post and confirm.) Perhaps this is where the deduction is going. Here's the relevant IRS reg:

https://www.irs.gov/retirement-plans/re ... tributions

HomeStretch
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Re: SEP-IRA and its relationship to other IRAs

Post by HomeStretch » Fri Nov 08, 2019 12:51 pm

Admiral wrote:
Fri Nov 08, 2019 12:36 pm
OK. I believe there are some SEP-IRA plans that do allow non-SEP IRA contributions by the employee. (Spirit Rider may post and confirm.) Perhaps this is where the deduction is going. Here's the relevant IRS reg:

https://www.irs.gov/retirement-plans/re ... tributions
Yes, I see now that Vanguard’s SEP IRA description per website does say employees may be able to make Traditional IRA contributions up to $6,000 limit. I didn’t think it was allowed. I revised my prior comment.

retiredjg
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Re: SEP-IRA and its relationship to other IRAs

Post by retiredjg » Sat Nov 09, 2019 8:41 am

Admiral wrote:
Fri Nov 08, 2019 12:36 pm
OK. I believe there are some SEP-IRA plans that do allow non-SEP IRA contributions by the employee. (Spirit Rider may post and confirm.) Perhaps this is where the deduction is going. Here's the relevant IRS reg:

https://www.irs.gov/retirement-plans/re ... tributions
This explains why he believes he is contributing to his SEP IRA - the money is going into the same account but it is not a SEP IRA contribution. It is his traditional IRA contribution instead.

This year, the limit for IRA contributions is $6k, not $5.5k. This $6k can go into traditional IRA, Roth IRA, or a combination of the two. The amount he contributes does not increase or decrease what the employer puts in as a SEP IRA contribution. Those limits are independent.



The things he needs to look at are
  • -whether the SEP IRA is a good place to put his traditional IRA contributions (how good a plan is it?)

    -whether it would be better to be using using Roth IRA instead of traditional IRA or maybe a combination

    -most importantly, whether his traditional IRA contribution is deductible or not (if not, he should definitely be using Roth IRA instead)

As for your overall question - other places to save money - the list is the same (IRA, HSA, maybe a 529 if there are kids and there is a state deduction). When all those things are exhausted, paying off debt or the taxable account (known as a personal account at Vanguard) is the next step. He should not be too worried about this - it is a great place for retirement money and he'll be happy he has it later on.

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