SEP IRA Contribution Limits For Small Businesses

While SEP IRA contribution limits can change from year to year, the current ceiling is $49,000. For those who are taxed as corporations and thus compensated as W-2 earnings, each year’s Simplified Employer Pension Plan investment cannot exceed one quarter of that income. Entrepreneurs taxed as sole proprietors can make SEP IRA contributions up to 20 percent of their adjusted earned income of up to $245,000.

Two of the primary attractions about this savings program are the SEP IRA contribution deadline of April 15 of the subsequent year, and the SEP IRA maximum contribution limit. Additionally, if the entrepreneur files a tax extension, that new October 15 deadline for filing is now offered for the SEP contribution as well. Another powerful attraction is that the money invested is one hundred percent tax deductible usually, and the earnings from the plan are tax deferred. Anyone who waits until she or he is 59 1/2 to withdraw funds from the plan only pays ordinary income tax on the withdrawal amount.

To be eligible to participate in a SEP a businessperson must be a sole proprietor, a partner or owner of another type of small business whether incorporated or not. Even if he or she participates in a 401(k), 403(b) or 457retirement plan through an employer, any additional self-employment will make her eligible to create and contribute to an SEP. Though the majority of SEPs are created by business owners that have no employees, there are some situations where this program could be the preferred for employees as well.

Small business owners often struggle to attract and retain quality employees because they cannot provide the benefits the large corporations can. The lure of an SEP IRA, however, might be just what these owners need to appeal to the right job seekers. The employer would decide at what level the SEP would be funded, with a 20 percent ceiling if unincorporated, 25 percent if a corporation. Each employee would have his or her own retirement account but the employer would make the contributions. The employee would get a nice retirement fund, and the employer would reap the tax deduction benefits.

Should a year be a financial struggle for the company the employer would be able to skip the contribution with no penalty. Another way to get around this stumbling block might be to use the SEP IRA as a motivational tool. The owner would tell employees at the beginning of the year that x dollars of profit must be made in order for everyone to earn an IRA contribution. Though not something a small business owner should jump into lightly, this Simplified Employee Pension Plan might create a nice nest egg, attract good staff, and still grow a profitable company.