Self-Contributing to a SEP IRA

[Blondetuco]

I recently started work at a small company - I'm the sole employee along with the business owner. For my retirement benefit, he will begin contributing 25% of my salary into a SEP IRA after 2 years of employment. While this is an amazing perk compared to the 4% 401k matching I'm accustomed to, my tax-advantaged savings are currently limited to the 6k in my IRA. My boss and I have a great relationship, and I'm considering this proposition to bridge that 2 year gap:

In order to get some money set-aside in a pre-tax account, I'm wondering if I could forgo a portion of my salary in order to get the IRA contribution immediately. In practice, I would take a 25% salary cut on my W2, and my company would contribute that amount into the SEP IRA account. I don't see a negative from my end, as this is money I would otherwise be saving in a brokerage account. I don't see why my employer would mind, aside from a little leg-work to adjust my paycheck/tax withholdings. Once I hit the 2 year anniversary, my salary would return to "normal" and the 25% IRA contributions continue depositing.

Is there a reason that either my employer or I would want to avoid this? Are there tax implications that I'm not considering?

[travel2020]

I don’t know specifically about SEP IRA but I’ve looked at other employer benefit plans for small businesses and generally they operate with specific rules e.g. benefit has to be offered to everyone equally, only available once certain conditions are met, etc. So if this is a qualification criteria, they may not be able to do anything different.

It could also just be a juicy carrot to get people to stay a few years minimum, similar to the golden handcuffs offered by many megacorps.

But I’d still ask and see if there’s any flexibility or other options.

[SeattleCPA]

I recently started work at a small company - I'm the sole employee along with the business owner. For my retirement benefit, he will begin contributing 25% of my salary into a SEP IRA after 2 years of employment. While this is an amazing perk compared to the 4% 401k matching I'm accustomed to, my tax-advantaged savings are currently limited to the 6k in my IRA. My boss and I have a great relationship, and I'm considering this proposition to bridge that 2 year gap:

In order to get some money set-aside in a pre-tax account, I'm wondering if I could forgo a portion of my salary in order to get the IRA contribution immediately. In practice, I would take a 25% salary cut on my W2, and my company would contribute that amount into the SEP IRA account. I don't see a negative from my end, as this is money I would otherwise be saving in a brokerage account. I don't see why my employer would mind, aside from a little leg-work to adjust my paycheck/tax withholdings. Once I hit the 2 year anniversary, my salary would return to "normal" and the 25% IRA contributions continue depositing.

Is there a reason that either my employer or I would want to avoid this? Are there tax implications that I'm not considering?

You're really just asking the employee to change the SEP-IRA plan for you. And that'll change it for everyone else too. (If he or she hires someone else.)

[Blondetuco]

You're really just asking the employee to change the SEP-IRA plan for you. And that'll change it for everyone else too. (If he or she hires someone else.)

This might sound silly, but does the employer have any discretion to make a SEP-IRA contribution to non-eligible employees? I envisioned this working similar to my previous employer opting not to claw-back bonus money that hadn't reached the vesting period: giving me some leeway without changing the rules for others. Tax codes are meant to be more stringent, I suppose.

[terran]

You're really just asking the employee to change the SEP-IRA plan for you. And that'll change it for everyone else too. (If he or she hires someone else.)

This might sound silly, but does the employer have any discretion to make a SEP-IRA contribution to non-eligible employees? I envisioned this working similar to my previous employer opting not to claw-back bonus money that hadn't reached the vesting period: giving me some leeway without changing the rules for others. Tax codes are meant to be more stringent, I suppose.

No, not really. They have to follow the terms of the plan (which they could amend) for all employees, so if they make a change for you then they'd have to make the same contributions for any other employees. It's meant to keep things fair. I don't know if it would be possible to amend the plan to start contributions immediately and then re-amend later if they hire another employee to change it back.

You could see if they'd be willing to open a 401(k) instead of the SEP. This could have the same 2 year waiting period for employer contributions, but would allow you to make employee contributions. It also might let the owner make larger contributions unless they have a salary over around $300k (at which point the 25% SEP contribution gets them to the same maximum contribution).

A 401(k) will cost them more than the SEP, but they're not too bad. If they're open to it I would start might search here: https://www.guideline.com/ and https://www.employeefiduciary.com/

[SeattleCPA]

You're really just asking the employee to change the SEP-IRA plan for you. And that'll change it for everyone else too. (If he or she hires someone else.)

This might sound silly, but does the employer have any discretion to make a SEP-IRA contribution to non-eligible employees? I envisioned this working similar to my previous employer opting not to claw-back bonus money that hadn't reached the vesting period: giving me some leeway without changing the rules for others. Tax codes are meant to be more stringent, I suppose.

No, not really. They have to follow the terms of the plan (which they could amend) for all employees, so if they make a change for you then they'd have to make the same contributions for any other employees. It's meant to keep things fair. I don't know if it would be possible to amend the plan to start contributions immediately and then re-amend later if they hire another employee to change it back.

You could see if they'd be willing to open a 401(k) instead of the SEP. This could have the same 2 year waiting period for employer contributions, but would allow you to make employee contributions. It also might let the owner make larger contributions unless they have a salary over around $300k (at which point the 25% SEP contribution gets them to the same maximum contribution).

A 401(k) will cost them more than the SEP, but they're not too bad. If they're open to it I would start might search here: https://www.guideline.com/ and https://www.employeefiduciary.com/

+1

P.S. He or she denies it, but I have suspicion that Terran works for either the Treasury or the IRS. He or she is soooo knowledgeable. :-)