Maximize Your Retirement: Contributing to Both a Roth IRA and SEP IRA in the Same Year

You can put money into both a Roth Individual Retirement Account (IRA) and a Simplified Employee Pension (SEP) IRA in the same year! By doing this, you get the benefits of both types of accounts, as long as you follow the rules for each. But it’s important to know how much you can put in each account and the rules for each one so you can make the most out of your contributions.

Contribution Limits Explained

Each type of retirement account has different rules about how much you can put in. For Roth and traditional IRAs, the limit for 2024 is $7,000. If you are 50 or older, you can add an extra $1,000—this is called a “catch-up contribution.” If you earned less than these limits, you can only contribute up to the amount you earned.

For a SEP IRA, the contributions are usually made by your employer, and they can be up to 25% of your pay or $66,000 in 2024, whichever is less. If you are self-employed or have your own business, this means you could save a lot for retirement using a SEP IRA.

Who Can Contribute?

You can put money in a Roth IRA at any age, even if you have already retired, as long as you still earn some taxable income. This means if you have a part-time job after you retire, you can still save money in a Roth IRA.

There is also something called a spousal contribution. If one spouse earns an income and the other doesn’t, the working spouse can put money into a Roth IRA for the nonworking spouse. This is called a spousal IRA, which allows couples to save even more for their retirement.

Examples of Contribution Strategies

• Let’s say you are 45 years old and have both a Roth IRA and a SEP IRA. You make $80,000 from being self-employed. You could put up to $7,000 into your Roth IRA and then also add 25% of your income (which is $20,000) into your SEP IRA.
• Here’s another example: Imagine you are 55 years old, work part-time, and make $6,000 a year. You could put $6,000 into your Roth IRA (since you can’t contribute more than you make).

Using both a Roth IRA and a SEP IRA gives you a lot of flexibility in saving for retirement. A Roth IRA lets your money grow tax-free, so you won’t pay taxes when you take it out in retirement. A SEP IRA allows you to put in larger amounts if you are self-employed. Understanding how both of these accounts work and using them together can help you save a lot for your future.

Key Financial Terms

• Roth IRA: This is a retirement account where you put in money that has already been taxed. This means you don’t get a tax break now, but when you take the money out during retirement, it’s tax-free. Example: If you make $5,000 from a part-time job, you could put some or all of that into a Roth IRA, and any money you make from it won’t be taxed in the future.
• SEP IRA: This is a retirement account usually set up by employers, but it’s also good for people who are self-employed. The limits are higher than a Roth IRA, which makes it helpful if you own a small business. Example: If you have a small business and pay yourself $100,000, you could put up to $25,000 into a SEP IRA (which is 25% of your pay).
• Catch-up Contribution: If you are 50 or older, you are allowed to put in more money than younger people can. Example: If you turn 50 this year and have a Roth IRA, you can put in $7,000 plus an extra $1,000, for a total of $8,000.