Can an Employer Contribute to a Traditional IRA?

An employer can contribute to a traditional IRA on your behalf, but only through a Simplified Employee Pension (SEP IRA) or a Savings Incentive Match Plan for Employees (SIMPLE IRA). Both are traditional IRAs, just governed by separate sections of the tax code that give the employer a deduction and let you receive the money tax-free until retirement. A direct employer deposit into an ordinary traditional IRA does not work as a retirement contribution: federal tax law reclassifies it as taxable wages.¹

Why a Regular Traditional IRA Doesn’t Work

A traditional IRA is a personal account between you and a financial institution. The tax code allows deductible contributions only for amounts paid by or on behalf of the individual, and any employer payment into that account gets treated as compensation included in your gross income for the year.¹ So if your employer writes a check to your personal IRA, it creates a tax event rather than a tax benefit. You owe income tax on the deposit as though it were a bonus, and neither side gets the advantages of a proper employer-sponsored plan.

SEP and SIMPLE IRAs exist to close that gap. The account is still a traditional IRA in your name, but the money flows in under rules that make it deductible for the business and non-taxable for you until you withdraw it.

SEP IRA: Employer Puts In All the Money

A SEP IRA is the most straightforward way for an employer to fund a worker’s traditional IRA. The employer makes all contributions directly into a traditional IRA set up for each eligible worker and takes a business deduction for every dollar deposited.² There is no employee deferral. Any business, from a sole proprietor to a large corporation, can adopt one.

Who Has to Be Included

The employer must contribute for every worker who has reached age 21, worked for the business during at least three of the last five years, and earned at least $800 in compensation during the year (adjusted for 2026).³ The contribution percentage has to be the same for everyone. If the owner gets 10% of pay, every qualifying employee gets 10% too.

How Much for 2026

For 2026, the employer can contribute the lesser of 25% of your compensation or $72,000.⁴ Only the first $360,000 of pay counts toward the calculation.⁵ Contributions are discretionary year to year, so the employer can change the percentage or skip a year entirely based on business conditions, as long as whatever rate they use applies uniformly.

Setting up a SEP is a light lift. An employer completes IRS Form 5305-SEP, a one-page written agreement that lays out participation rules, and shares it with every eligible worker.⁶ There is no annual filing with the IRS.

SIMPLE IRA: Shared Funding at Smaller Employers

A SIMPLE IRA splits the funding. You make salary-deferral contributions from your paycheck, and the employer is required to add either a match or a flat contribution. The plan is only available to employers with 100 or fewer employees who earned at least $5,000 in the prior year.⁷ A business that grows past that threshold gets a two-year grace period before it has to transition to another plan type.

Your Eligibility and Deferral Limits

You qualify if you earned at least $5,000 in any two preceding calendar years and are reasonably expected to earn $5,000 in the current year.⁸ An employer can set a lower threshold but cannot add stricter conditions beyond the compensation requirement.

For 2026, you can defer up to $17,000 of salary. If you are age 50 or older, you can add a $4,000 catch-up. Workers aged 60 through 63 get a higher catch-up limit of $5,250 under SECURE 2.0.⁹ Qualifying small employers, generally those with 25 or fewer employees, can offer a higher deferral limit of $18,100 for 2026 under a separate SECURE 2.0 provision.

What the Employer Has to Put In

The employer picks one of two contribution methods each year. Under the match, they contribute dollar for dollar on your deferrals up to 3% of your annual compensation. The match can be reduced to as low as 1% in a given year, but only for two out of any five-year period. Under the nonelective option, the employer contributes 2% of compensation for every eligible worker who earned at least $5,000, whether or not that worker defers anything. Only the first $360,000 of compensation counts for this calculation in 2026.¹⁰

Both types of employer contributions vest immediately. You own 100% of the money the moment it lands in the account.¹¹

Payroll Deduction IRAs Aren’t Employer-Funded

A payroll deduction IRA looks like an employer benefit but isn’t. You open a traditional or Roth IRA with a financial institution, authorize a recurring deduction from your paycheck, and the employer forwards each deduction to the provider.¹² The money is entirely yours, from after-tax wages, subject to the standard IRA limit of $7,500 for 2026.⁹ The employer’s role is administrative. This arrangement matters because a growing number of states now require employers that don’t offer a qualified retirement plan to facilitate payroll-deduction access to a state-sponsored IRA program.¹³

Roth Election Under SECURE 2.0

Before SECURE 2.0, SEP and SIMPLE contributions all went into pre-tax accounts. Starting in 2023, employers that maintain a SEP or SIMPLE can offer employees the option to have salary-reduction contributions deposited into a Roth IRA instead, where the money goes in after tax but grows and comes out tax-free in retirement.¹⁴

A separate provision allows employees to designate employer matching and nonelective contributions as Roth. When you make that election, those employer contributions are reported on Form 1099-R and included in your taxable income for the year, since Roth treatment means paying tax upfront.¹⁴ This is voluntary. The default remains traditional pre-tax treatment.

When the Contributions Have to Be Deposited

SEP contributions have to be deposited by the due date for filing the business’s federal income tax return, including any extensions. A SEP can even be established retroactively for a prior tax year as long as it is adopted and funded by this deadline.²

SIMPLE IRA matching and nonelective contributions must reach the employee’s account no later than the tax-return filing deadline, with extensions, for the year that includes the last day of the calendar year the contributions cover.⁸

Payroll-deducted employee contributions have to be transmitted as soon as they can reasonably be separated from general business assets. The Department of Labor’s outer limit is the 15th business day of the following month, with a seven-business-day safe harbor for plans with fewer than 100 participants.¹⁵

How This Affects Your Own IRA Deduction

Employer contributions to a traditional SEP or SIMPLE IRA are not included in your gross income for the year they are made.² The money grows tax-deferred, and you pay ordinary income tax when you take distributions. A SEP-IRA follows the same distribution and rollover rules as any traditional IRA, so early withdrawals before age 59½ face a 10% penalty on top of regular income tax in most cases.

One wrinkle catches people off guard. Participating in a SEP or SIMPLE plan counts as being covered by a workplace retirement plan for purposes of deducting your own personal traditional IRA contributions. If you also contribute to a personal traditional IRA on the side, your deduction phases out between $81,000 and $91,000 of modified adjusted gross income for single filers in 2026, and between $129,000 and $149,000 for married couples filing jointly when the contributing spouse is covered.⁹ The employer’s contribution to your SEP or SIMPLE is unaffected. What can shrink or disappear is the deduction for the extra money you put in on your own.

1
Office of the Law Revision Counsel. 26 USC 219 Retirement Savings
2
Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
3
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs
4
Internal Revenue Service. SEP Contribution Limits Including Grandfathered SARSEPs
5
Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
6
Internal Revenue Service. SEP Fix It Guide SEP Plan Overview
7
Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – More Than 100 Employees
8
Internal Revenue Service. Retirement Plans FAQs Regarding SIMPLE IRA Plans
9
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
10
Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits
11
Office of the Law Revision Counsel. 26 USC 408 Individual Retirement Accounts
12
Internal Revenue Service. Payroll Deduction IRA
13
U.S. Department of Labor. Payroll Deduction IRAs for Small Businesses
14
Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2
15
U.S. Department of Labor. Employee Contributions Fact Sheet