I own a pool company in Phoenix and max my IRA each year. I think a SEP might be better for retirement savings, but my CPA told me ‘no.’ Who’s right?

Question: “I am a small business owner. I have a pool service in Phoenix, Arizona. I contribute to an IRA and max it out every year. I have heard about a SEP retirement account but my CPA says I am not eligible to fund that. I am doing business as an LLC with an S Corp designation and I take a payroll check. I have done a fair amount of research on the matter and I can’t find anything that says I’m not eligible. Is this accurate? Who can help give me some guidance in this department?”

Answer: Based on what we know, it’s likely that you’re eligible to contribute to a SEP IRA — but you’ll likely want to consult a financial adviser and a CPA to make sure you’re doing it right. You can find advisers at CFP Board, NAPFA or use this free tool to get matched with a fiduciary adviser from our ad partner SmartAsset. To find CPAs, seek referrals from friends, colleagues, your financial adviser or use the National Association of Tax Professionals (NATP) directory to filter candidates by location and expertise.

SEP IRAs are powerful as they allow business owners to contribute more than a traditional IRA. That said, once you add your employees to a SEP IRA, the compliance and cost implications can add big hiccups. “This is a good time to get a second opinion from a CFP professional who understands how retirement plans work for small business owners operating as LLCs with S Corp elections,” says Dustin Suttle, certified financial planner at Suttle Crossland Wealth Advisors.

To be eligible for — and contribute to — a SEP IRA, business owners must follow specific rules, explains Andrew Rotz, certified financial planner at Fruitful. For LLCs taxed as S corporations, SEP contributions must be made as employer contributions from the business account and are limited to up to 25% of the owner’s W-2 compensation, capped at the annual SEP contribution limit ($72,000 for this year), says Rotz.

What’s more, he says differences between LLCs and S-Corps can pretty easily get muddled, and if a CPA or financial adviser doesn’t work with them regularly, they may confuse some of the IRS Pub 560 rules. “You will effectively be making contributions to the SEP IRA as an employer and contributions to your traditional IRA as an employee. I’d recommend having your current CPA review IRS Pub 560 and have a discussion with you, or explore interviewing a few other CPAs who may be more knowledgeable in this area if this is an avenue you decide to pursue,” says Rotz.

For his part, certified financial planner Brad Lineberger at Seaside Wealth Management says should you decide to go the SEP IRA route, you’re allowed to make a contribution all the way up until the tax filing date plus extension. “There is a formula to determine how much you can contribute to your SEP and it’s based on your income,” says Lineberger.

If you’re self-employed, you’d take your net business income, let’s say it’s $100,000, and subtract half of your self-employment tax. If your self-employment tax is $14,130, you’d divide that by 2 to get $7,065 and then multiply the adjusted earnings by 20%. This would mean your SEP contribution would be $18,587. If you’re an employer paying for employees, you’d just contribute 25% of each eligible employee’s gross compensation.

Suttle says SEP IRAs get tricky as they require proportional contributions to all eligible employees. “That means if your S Corp has staff who are 21 or older, have worked for you in at least three of the last five years and earned $750 or more in 2024, you would be required to contribute the same percentage of their wages as you do for yourself,” says Suttle.

Key question: Do you have any employees?

The biggest consideration here is the number of employees you have. “If you have employees and commence with a plan, you will need to consider matching requirements. The concept behind this is fairness to an employee population, so that owners don’t do max funding for themselves and leave the employees without any deferred saving benefits,” says financial adviser Bill Haydon at Wells Fargo Advisors Financial Network. 

If you’re the only employee, you may want to consider a solo 401(k) instead. “It often offers more flexibility and higher contribution limits. With a solo 401(k), you can contribute both as the employee (up to $23,000 if you’re under 50, or $30,500 if you’re over 50) and as the employer up to 25% of your compensation, giving you the opportunity to double dip and potentially contribute more than you could with a SEP,” says certified financial planner Gabriel Shahin at Falcon Wealth Planning. 

If you have employees, a SEP would require you to contribute the same percentage of compensation for eligible employees as you do for yourself, which could get expensive. “Solo 401(k)s are only available if you have no full-time employees other than your spouse. If you’re unsure why your CPA has advised against a SEP, or hasn’t mentioned a solo 401(k), it might be worth getting a second opinion from a financial adviser or retirement plan specialist familiar with small business retirement options,” says Shahin.

What kind of pro can help? 

You’d likely benefit from tax planning and working with a CPA or a CFP to map out what makes the most sense given your circumstances. “Review how much you’re paying yourself through the S Corp payroll and depending on tax brackets, it might make sense to do a SEP IRA and Roth IRA,” says Matthew Saneholtz, certified financial planner at Tobias Financial Advisors.

Working with a CFP ensures you’re engaging a professional who has completed extensive coursework, passed exams, performed thousands of hours of work-related experience and upholds a fiduciary duty. Similarly, CPAs must meet education requirements (often 150 semester hours of college education), pass exams and complete supervised work before applying for licensure to the state Board of Accountancy.

Have an issue with your financial planner or looking for a new one? Email questions or concerns to picks@marketwatch.com.

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