Can I Contribute to an SEP if I Have Rental Income Only in My LLC?

Being self-employed also means being self-reliant. You must establish your own retirement plan and fund it accordingly. If you choose a Simplified Employee Pension (SEP) IRA as the retirement plan for your limited liability company (LLC), your SEP is funded with compensation you earn from the business. Businesses are required to defer compensation to this type of retirement plan as opposed to allowing employees to make the contributions on their own. If the income from your LLC is from rental income only however, you should know under what conditions you can contribute to your SEP.


Contribution Rules

The IRS specifically excludes some forms of income from being contributed to a SEP IRA. These exclusions are on what the IRS considers "unearned income." Unearned income is income from investments, including rental property. Thus income from personal property cannot be used to fund a SEP IRA. The IRS however does allow earned income as an acceptable source of income for contribution purposes. This would include income generated from a business.


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While income from personal rental property is excluded, income derived from property as part of your business is acceptable. The income must be incidental to the operation of your business. If your LLC is a real estate business but your business involves making money buying and selling property, you may use your rental income to fund the SEP IRA, even if this is temporarily your only source of income.



By funding your SEP IRA with rental income, you may ensure consistent contributions to the plan each year. You must fund the SEP using money you earn through the LLC for the contributions to be legitimate. If you have consistent rental income, you may be more certain of your retirement income than you otherwise would be. In addition to this, your rental income would otherwise be subject to income tax but avoids this tax if it is deferred to the SEP. It will be taxed when you withdraw it, but it has time to grow into a larger savings before that happens.



You should not rely on rental income to fund a SEP IRA. Your business cannot solely consist of rental income for SEP contributions. While you may fund your SEP with money you made on rental income, the business should have other business operations from which you earn income rather than what the IRS considers "unearned" or "investment" income.