SEP IRA is a Simplified Employee Pension Individual Retirement Account, and derived its name based on the fact that it is simple. The purpose of the SEP IRA is to provide an IRA that functions in a similar manner to a pension for use by small business employers and self-employed workers. It’s flexible enough that it can be rolled over into a different form of IRA if employment changes or the owner becomes eligible for a different plan. Because it is designed primarily for the small business, the administrative costs of the SEP IRA are low, and for the self-employed there are normally no costs at all for administration of the account.
Major requirement of the SEP IRA regarding the benefits:
A business with employees must provide the same benefits to all employees. To qualify for the SEP IRA under employee participation, that employee must be over 21 years old and been employed for three of the last five years, earning at least $450 of wages in the previous year. In a SEP IRA, the employer makes contributions to the plan from the employee’s earnings, up to 25% of the employee’s total income. This portion of the employee’s earnings deposited into the SEP IRA can save on taxes and is deductible.
For the self-employed individual, the contribution limit is 20% of earnings and the maximum annual limit is approximately 18.6% of the net profit as calculated on his self-employed worker tax form. Distributions from a SEP IRA mirror those from a Traditional IRA. Disbursements are taxed at the prevailing tax rate at the time of withdrawal and subject to penalty if withdrawals are taken before age 59 ½. Distributions from the account must begin by age 70 ½. For the small business that wants to provide a retirement plan for employees but does not have the resources to fund a conventional plan, the SEP IRA provides a retirement safety net for the business and its workers.
Flexibility of the SEP IRA:
The SEP IRA appeals to many business owners because, unlike other types of IRA accounts, there is no set obligation for contributions. The employer is allowed to alter the amount and frequency of plan contributions based on profitability of the business, and can make these changes annually. If the company is a start-up with smaller profits, the employer simply sets up the SEP IRA with a modest employer match. As the business grows and profits become larger, the plan can be changed to larger contributions. If the business has a few years of struggle, contributions can be reduced until things pick up again. A business will appreciate the ease of setting up the SEP IRA, done easily with a two page form. Each employee completes an investment application that is provided by the company that holds the investment funds. There is no required reporting to the IRS on annual returns, so the small business can easily manage the entire process.
Most small businesses choose to have their plan held by larger mutual fund companies, allowing their employees to select how they want to invest their money and eliminating the choice of investments from the employer’s responsibilities. The individual employees decide for themselves. Owners of small businesses appreciate the fact that with a SEP IRA plan, they can offer their employees a retirement plan as part of the benefit package, and perhaps attract a higher caliber worker to a smaller company. Employees benefit as well, aided by their SEP IRA contributions building retirement security for them. The SEP IRA is simple to understand, easy to administer, and an excellent resource for small businesses and the people those businesses employ.
For more information, see SEP IRA Account and SEP IRA Limits
Also see: SEP IRA on Wikipedia
Photo courtesy of Salvatore Vuono
Roth IRA Contribution Limits 2011
The Roth IRA contribution limits 2011 establish the maximum amount you can invest for retirement via an IRA. The regular IRA and Roth IRA Contribution Limits 2011, plus the 2011 standard IRA deductibility restrictions and the 2011 Roth IRA income limits, are all critical considerations.
( Notice : If you are looking for the IRA limits for 2010 related to the April 15, 2011 tax filing deadline, review IRA contribution limits 2010. If you are looking for Roth IRA Contribution Limits 2011, keep reading.)
Roth IRA Contribution Limits 2011
The Roth IRA Contribution Limits 2011 were unchanged from 2010. Since 2008, the maximum you may contribute to a traditional IRA each year is $5,000. However, if you will be fifty or older by the end of the year, you may contribute an extra $1,000, for a $6,000 total IRA contribution limit. Remember that you and/or your spouse are required to have earned income at least as much as the amount you contribute.
These limits apply to both traditional and Roth IRAs. Even though you may be eligible to contribute to both plans, your combined contribution to both accounts may not be greater than your above limit ($5,000 or $6,000).
Deductible Roth IRA Contribution Limits 2011
Although there is no maximum income restriction for contributing to a regular IRA, there are income caps to deducting standard IRA contributions, which will vary based on marital status, income, and workplace retirement (for example, 401(k), 403(b) plan eligibility).
Roth IRA Contribution Limits 2011: Income Limits
Unlike standard IRA contributions, not every worker can contribute to a Roth IRA. Based on one’s marital status and income, some high-income earners are not eligible to contribute to Roth IRAs. But, since these plans are so advantageous to your preparations for retirement, be sure to understand the restrictions every year before deciding that you don’t qualify.
Roth Conversion Contribution Limits 2011: Income Limitations
Even if you earn too much income for a direct Roth IRA contribution, you might be able to use a Roth IRA by way of the backdoor. Roth IRA Contribution Limits 2011 allow the ability to convert a standard IRA to a Roth IRA became available to all taxpayers regardless of income on the 1st of January, 2010. Previously, a conversion was only accessible to people who had a modified adjusted gross income of $100,000 or less.
Per the IRS:
Roth IRA Contribution Limits 2011
|Roth IRA Contribution Limits 2011 Combined with Traditional IRA Limits
If you are under 50 years of age at the end of 2011: The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2011. This limit can be split between a traditional IRA and a Roth IRA but the combined limit is $5,000.The maximum deductible contribution to a traditional IRA and the maximum contribution to a Roth IRA may be reduced depending on your modified adjusted gross income.
If you are 50 years of age or older before the end of 2011: The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2011. This limit can be split between a traditional IRA and a Roth IRA but the combined limit is $6,000. The maximum deductible contribution to a traditional IRA and the maximum contribution to a Roth IRA may be reduced depending on your modified adjusted gross income.
See Publication 590, Individual Retirement Arrangements (IRAs) for additional information.
For more information, please visit the Roth IRA Contribution Limits 2011 info page and compare IRA Contribution Limits 2010 and 2011.
Roth IRA Contribution Limits 2011 are changing slightly for 2012. Stay tuned for the update…