Can I Contribute to Both a Traditional IRA and an SEP-IRA?

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Both the traditional IRA and the SEP-IRA are excellent retirement savings vehicles. If you work a traditional job and have income on a side from self-employment or a business you own, you can take advantage of the tax savings and tax deferred growth of both plans. Many workers today run their own businesses on a part time basis, and an SEP-IRA provides a great way to put extra money aside while saving money on current taxes.

W-2 Income

You must have earned income equal to or greater than the amount you contribute to your traditional IRA account. That means that if you plan to contribute $5,000 to your IRA, you must have at least $5,000 worth of earnings shown on your W-2 form. For 2010 and 2011, you can contribute up to $5,000 to your traditional IRA. If you are 50 years of age or older, you can contribute an extra $1,000 to the plan, for a total of $6,000.

Self-Employment or Business Income

If you have income from self-employment, such as freelance work or consulting jobs, you can open an SEP-IRA and use it to shelter some of that income from taxes. You can also use an SEP-IRA if you own a small business. The money you contribute to the SEP-IRA grows on a tax-deferred basis all the way out to retirement, making it an excellent choice for self-employed individuals and small business owners. For 2010, you can contribute up to 25 percent of your earnings, up to a maximum of $49,000.

Low Costs

Opening both an SEP-IRA and a traditional one should not be an expensive undertaking. There are a number of administrators who can handle both accounts, including brokerage firms, mutual fund companies and banks. Both traditional IRAs and SEP-IRA are reasonably easy to open and maintain, and many administrators handle those accounts without an annual maintenance fee. You might be able to get a bigger bang for your buck and better service by holding both your SEP-IRA and your traditional IRA with the same institution. Many brokerage firms and mutual fund companies, for instance, waive certain fees and provide extra services for accounts over a certain size.

Preparing Your Taxes

If you have both traditional wage income and income from self-employment, you might want to consult with a CPA before making your IRA contributions and starting your tax return. A CPA can help you identify business exemptions and deductions you might have missed, as well as help you determine the maximum you can contribute to your SEP-IRA based on your previous year's business or self-employment income. If you prefer to do your taxes yourself, look for a tax preparation software package that provides support for home based businesses or business income. The standard versions are unlikely to include support for SEP-IRA and other business retirement plan contributions.

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