IRA Rules

Archive for June, 2007

Question: Am I required to contribute a percentage from my salary to a SEP-IRA that the employer has set up?

I have been told that I am required to contribute a set percentage of my salary into the SEP IRA that the company has set up. But in some research that I’ve done, it looks like the employer contributes money of their own, and that the employee is NOT required to contribute out of their salary. Does anyone know the rules for an SEP IRA?

Answer: There are a lot of rules on SEP IRA‘s. It’s not common to REQUIRE employees to pay in but if you don’t, you will not be eligible for employer contributions (unless your employer is extremely extra-generous). Their statement that a contribution by you is “required” may really mean it’s a requirement to contribute IF you want the employer match; they may just have worded it strangely. Usually if you do not contribute to your own IRA, the employer does not either. In fact, I have never heard of an employer putting money in someone’s IRA or 401(k) regardless of the variety if the employee does not make contributions (although I am sure it could happen).

Contributing to your SEP IRA is a really, really good thing and I’m not sure why you’d want to bypass that— it lowers your taxable income (this is super important, especially if you are on a 1099 form) and your employer match is basically free money— you don’t have to do anything to get it except put away some of your own money for retirement.

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