SEP IRA Contribution Limit
A Simplified Employee Pension Plan, commonly known as a SEP, might be an ideal compromise for smaller businesses that are unable to provide a conventional retirement plan for their employees. A SEP plan allows employees of a business to make higher contributions to a traditional IRA through the company where they work. Many employees choose to join the plan since their contributions are taken from pre-tax income. These plans are appropriate for small companies, as well as for LLCs, S and C corporations, sole proprietorships and partnerships. Sep plans are also a very good choice for the self-employed, however the self-employed SEP IRA contribution limit is calculated differently. Since the self-employed do not get wages, their contribution will be based on net profits from the business venture. Self-employed individuals can contribute 20% of net profits up to $44,000 annually. The contribution is calculated by taking the net self-employment income and subtracting one half of the self-employment taxes. The resulting net/net self-employment income is then multiplied by 20% to arrive at the contribution amount. Many smaller companies like the SEP because it allows them to offer retirement savings benefits for their employees. There are no mandated contribution requirements for the SEP plan, except that contributions must be uniform. A 20% contribution to one employee’s account requires a similar 20% contribution to all eligible employee accounts. The employer can make decisions on how often and what percentage will be contributed annually, and frequently bases this on the company’s net profit picture and prevailing economic conditions that reflect on the business. No contribution is necessary, so the plan can be put on hold if the employer chooses to do so. In a company plan, the maximum SEP IRA contribution limit is $49,000 annually, or 25% of the individual’s yearly compensation. Businesses often have the plan held by a mutual fund company, allowing the individual employees to select their own investments from the allowable funds authorized for the plan. Employees may choose more aggressive investments or very conservative ones, depending on their own goals and investment philosophy. Contributions to a SEP IRA are generally 100% tax deductible and the investment earnings in a SEP IRA grow tax deferred. Any employer can establish a SEP, and the plan is especially attractive for smaller companies and the self-employed. Benefits of the plan include the low cost of establishing and administering it, the small amount of paperwork required, the ease of qualifying employees for participation, and the higher allowed SEP IRA contribution limit. An employee is defined as someone at least 21 years of age who has worked for the employer for three of the last five years and received a minimum of $550 in compensation. Contributions are made in cash, not stock. Generally the SEP must be funded by the tax filing deadline. Similar to other forms of the traditional IRA, distributions from the SEP can start as early as age 59 ½ years old without incurring tax penalty, and must begin no later than age 70 ½ years old. The plan is portable, so able to be rolled into a different IRA or transferred to another employer’s qualified retirement plan in the event of a change in employment. The generous SEP IRA contribution limit is a compelling reason to learn more about the plan.
