Can A W-2 Employee Contribute to a SEP IRA?

If you’re a W-2 employee, your employer may offer a SEP IRA instead of a traditional  401k plan. But unlike a 401k where you can make your own employee contributions, a SEP IRA allows only employer contributions. You can’t contribute directly to the account.

A SEP IRA is often chosen by small businesses as a simpler, lower-cost alternative to a  401k. It’s easier to set up and manage, making it a practical option for employers who want to offer retirement benefits without the administrative burden of a full 401k plan.

If your employer contributes to a SEP IRA on your behalf, here’s what to know about eligibility, contributions, and how the account works.

Can a W-2 Employee Contribute to a SEP IRA?

No, W-2 employees cannot contribute to a SEP IRA themselves. Only the employer can make contributions to the account.

Employers can contribute up to 25% of their compensation, up to the following limits: 

📌 You can find more details about SEP-IRAs on the IRS website here.

Equal Contributions Are Required

If an employer contributes to their own SEP IRA, they must give equal percentage contributions to every eligible employee’s account.

✏️ Hypothetical Example: If your employer contributes 5% of their compensation to their own SEP IRA, they must also contribute 5% of your compensation to your SEP IRA—no exceptions. 

If any employee receives more or less than the required the employer must correct the discrepancy to stay compliant.

📌 Also read: What is a SEP IRA?

Who Is an Eligible Employee?

According to IRS rules, an employee is eligible to receive SEP IRA contributions if they: 

✅Are at least 21 years of age

✅ Have worked for the employer at least 3 of the past 5 years

✅ Earned at least $750 in compensation during 2024 or 2025

Employer Contributions Are Optional

Employers are not required to contribute every year. If business is slow, they can reduce or skip contributions entirely.

For employees, this means your SEP IRA may go unfunded in years when your employer decides not to contribute, since only employers can fund SEP IRAs and employees cannot make contributions on their own.

How Do SEP IRA Contributions Work for Employees?

When your employer sets up a SEP IRA, they must also open SEP IRA accounts for all eligible employees. These accounts are technically Traditional IRAs that receive employer-funded SEP contributions.

✅ You own the account — it’s your name on the SEP IRA.
✅ Employer contributions are immediately 100% vested — the money is yours right away.
✅ You control how funds are invested — including options like stocks, bonds, mutual funds, and other traditional investments.

So, can you contribute to your SEP IRA yourself? 

No, you can’t contribute directly to your SEP IRA as an employee. However, because the SEP IRA is technically a Traditional IRA, you can still make regular Traditional IRA contributions (subject to income limits and IRS rules):

Anyone with earned income (W-2 employee or contractor) can contribute to a Traditional IRA. This contribution doesn’t go into the SEP IRA, but you can contribute to your Traditional IRA separately and deduct it from your taxable income.

✏️ Hypothetical Example: 

Let’s say you earn $50,000 in 2025:

✅ The $5,000 you contributed to your Traditional IRA is tax-deductible.
❌ The $2,500 from your employer is not tax-deductible since it’s not an elective salary deferral.
✅ The $2,500 contribution is immediately vested — you own it outright.

The money in your account can grow tax-deferred until you take qualified distributions in retirement.

You can choose from a range of investment options within the SEP IRA or roll over the funds to another qualified retirement account, such as a Solo 401k.

📝 Important: All investments involve risk. Past performance is not a guarantee of future results. Tax advantages depend on IRS compliance and individual circumstances.

When Can Employees Withdraw Money from Their SEP IRA?

The SEP IRA withdrawal rules apply the same way for both employers and employees: 

✅ You can begin taking penalty-free withdrawals at age 59½.
❌ Early withdrawals (before 59½) are generally subject to  a 10% penalty plus ordinary income tax on the withdrawn amount.

What About Required Minimum Distributions (RMDs)?

Starting at age 73, SEP IRA owners are required to begin  taking Required Minimum Distributions (RMDs). The IRS calculates RMDs based on your account balance as of December 31 of the previous year and your life expectancy score.

📝 Important RMD deadlines:

Failing to take your RMD may result in an IRS penalty, so it’s important to stay on top of these deadlines.

Disclaimer

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.

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