Would you desire to save more for retirement as a business owner? Would you desire to raise your self-directed IRA account balance faster as an investor? If you have business revenue, a Simplified Employee Pension (SEP) plan can be funded through your self-directed IRA.
A SEP plan is a company-sponsored retirement plan that allows employees to contribute to the business owner’s IRA. With a SEP plan, you can contribute up to 25% of your annual salary, or $55,000 in 2018, whichever is less. With such high contribution limits, a SEP plan might be a good method to boost your self-directed IRA account balance and diversify your investments.
SEP plans offer a number of advantages in addition to the substantial contribution limit:
- You have until the deadline for your business’s tax return, including extensions, to set up and fund a SEP plan. For example, if you want to make a SEP contribution for 2018 for your corporation or sole proprietorship, you can do so with a tax-filing extension until October 15, 2019.
- Contributions to a SEP plan are optional. You are not obligated to contribute to the SEP plan on an annual basis. If you do decide to contribute, the amount you contribute may change from year to year.
- You can still make a Traditional or Roth IRA contribution the same year you make a SEP contribution ($5,500 for 2018; $6,500 if you’re 50 or older).
SEP plans are especially well-suited for start-up enterprises or other organizations with considerable earnings fluctuations since they provide business owners the option of contributing and how much to contribute each year.
SEP plans can be maintained by sole proprietors, partnerships, S-Corporations and C-Corporations, not-for-profit organizations, and state and local government bodies, among others. SEP plans are simple to administer and maintain, with the plan paper taking only a few minutes to prepare.
Calculating your maximum SEP contribution and deduction if you are self-employed is complicated, and many self-employed people seek expert tax guidance to determine their SEP plan payments. The IRS Publication 560, Retirement Plans for Small Businesses, has extra information and a worksheet to compute contributions.
If your company has employees and you want to contribute to a SEP plan for the year, you must pay contributions for all employees who meet the plan’s eligibility conditions. You may need to be a specific age (up to 21) and have worked for you for at least three of the previous five years to be eligible. Employee contributions are often allocated on a pro rata basis (i.e., the amount given to each employee is determined by the employee’s income in relation to the total compensation of all eligible employees). When you set up a SEP plan, you must notify your employees, and you must notify them again within 30 days after making a SEP contribution.
What are the SEP contribution limits for 2018?
Sections 402(h) and 415 of the Internal Revenue Code limit the amount of contributions made to an employee’s SEP-IRA to the lesser of $61,000 in 2022 ($58,000 in 2021; $57,000 in 2020; $56,000 in 2019 and $55,000 in 2018) or 25% of the employee’s pay. Compensation for 2022 is likewise capped at $305,000 ($290,000 in 2021; $285,000 in 2020; $280,000 in 2019; and $275,000 in 2018). Lower contribution limitations control if your SEP plan document includes lower contribution limits.
If you’re self-employed, such as a partner or an owner-employee, there are additional standards to follow. Compensation is your net earnings from self-employment, which includes both the deduction for one-half of your self-employment tax and the deduction for contributions to your own SEP-IRA when computing the deduction for contributions to your own SEP-IRA. As a result, the deduction for payments to your personal SEP-IRA is calculated indirectly by lowering the contribution rate specified in your plan. See Publication 560, Retirement Plans for Small Businesses, for more information on the deduction limitations for self-employed individuals (SEP, SIMPLE, and Qualified Plans).
The amount you can contribute to a Roth IRA or a regular IRA is unaffected by employer contributions to a SEP-IRA. Contributions to a regular IRA, on the other hand, may be ineligible for a tax deduction. For more information, see Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).
How much can I contribute to my SEP IRA this year?
Limitations of the SEP plan Employer contributions are the only way to fund SEP plans that aren’t SARSEPs. Payments for self-employed individuals are limited to 25% of net self-employment earnings (excluding contributions for yourself), up to $58,000 (for 2021; $57,000 for 2020).
How much can I contribute to my SEP?
You can’t contribute more than the lesser of the following amounts to each employee’s SEP-IRA each year:
- $61,000 in 2022 ($58,000 in 2021; $57,000 in 2020; and later years subject to annual cost-of-living increases).
These limits apply to all defined contribution plans, including SEPs, that you design for your employees. Employee compensation of up to $305,000 in 2022 ($290,000 in 2021; $285,000 in 2020; subject to cost-of-living increases for succeeding years) may be considered. If you’re self-employed, you’ll need to do some extra math to figure out your own contributions.
Find out how to fix it if you’ve contributed more than the annual restrictions to your SEP plan.
How much can I contribute if I’m self-employed?
Contributions to SEP-IRAs made by workers are subject to the same limits as contributions made by self-employed people. When calculating the maximum deductible contribution, however, certain criteria apply. Details on calculating the contribution amount can be found in Publication 560.
Must I contribute the same percentage of salary for all participants?
The IRS model Form 5305-SEP, like most SEPs, requires you to make allocations commensurate to your employees’ salaries/wages. This means that everyone’s share of the salary is the same percentage.
Find out what you may do if you haven’t made contributions to participants’ SEP-IRAs equal to the same percentage of each participant’s remuneration.
If you’re self-employed, deduct your SEP contribution from your net profit, minus one-half of the self-employment tax. For information on calculating the contribution amount, see IRS Publication 560.
If I participate in a SEP plan, can I also make tax-deductible traditional IRA contributions to my SEP-IRA?
If your SEP-IRA allows non-SEP contributions, you can make normal IRA contributions to your SEP-IRA up to the maximum yearly limit (including IRA catch-up contributions if you are 50 or older). However, because of your membership in the SEP plan, the amount of your ordinary IRA contribution that you can deduct on your tax return may be decreased or eliminated.
If I participate in a SEP plan, can I contribute to a Roth IRA in addition to receiving contributions under the SEP plan?
A traditional IRA that holds contributions provided by an employer under a SEP plan is known as a SEP-IRA. You can contribute to a standard or Roth IRA on a regular basis and receive employer contributions to a SEP-IRA. Employer contributions to a SEP plan have no bearing on the amount you can put into an IRA on your own.
Because a SEP-IRA is a typical IRA, you may be allowed to contribute to it on a yearly basis rather than starting a new IRA account. Any money you put into a SEP-IRA, however, will restrict the amount you can put into other IRAs, including Roth IRAs, for the year.
Example 1: JJ Handyman, Nancy’s employer, contributes $5,000 to Nancy’s SEP-IRA at ABC Investment Co. based on the JJ Handyman SEP plan’s provisions. Nancy, 45, is allowed to contribute $3,000 to her SEP-IRA account at ABC Investment Co. through regular IRA contributions. If Nancy wishes to contribute to her Roth IRA at XYZ Investment Co. for 2019, she has until April 15, 2020 to do so ($6,000 maximum contribution minus $3,000 previously put into her SEP-IRA).
Example 2: JJ Investment Advisors is owned and operated by Nancy, who is 45 years old. Nancy puts the maximum amount to her SEP-IRA for the year, which is $56,000. Nancy can also contribute to her SEP-IRA on a monthly basis, if her SEP-IRA allows it, or to her Roth IRA at XYZ Investment Co. Her total conventional IRA and Roth IRA contributions for 2019 can’t exceed $6,000, and they can’t be combined with her SEP contributions.
Can I make catch-up contributions to my SEP?
Employer contributions are the only source of funding for SEPs. Only employee elective deferrals are eligible for catch-up payments. You may be able to make catch-up IRA contributions if you are allowed to make traditional IRA contributions to your SEP-IRA account.
Must I contribute to the SEP every year?
No, you are not obligated to make a contribution each year. Contributions to the SEP must be made to the SEP-IRAs of all qualified employees in years when you contribute to the SEP.
Do I have to contribute for a participant who is no longer employed on the last day of the year?
If they are otherwise qualified for a contribution, you do. A need for work on the last day of the year cannot be included in a SEP. If the employee is otherwise eligible, they must contribute to the SEP. This includes employees who pass away or quit their jobs before the contribution is made. Find out how to remedy a mistake in your SEP plan if you haven’t made a contribution for an eligible employee.
Can I contribute to the SEP-IRA of a participant over age 70 1/2?
Even if they are past the age of 70 1/2, you must contribute for each employee qualified to participate in your SEP. However, the employee must also take minimal distributions. Find out how to make up for it if you haven’t contributed to your SEP plan for an eligible employee.
When must I deposit the contributions into the SEP-IRAs?
Contributions for a year must be deposited before the due date (including extensions) for filing your federal income tax return for the year. If you get a tax return extension, you have until the end of the extension period to deposit your contribution, regardless of when you actually file your return.
You are not authorized to deduct any SEP plan contributions on that year’s return if you did not request an extension to file your tax return and did not deposit the SEP plan contributions by the filing due date for that return. Contributions may be deducted from your tax return the following year.
You must file an updated tax return as quickly as possible if you wrongly deducted SEP plan contributions on your return.
How much of the SEP contributions are deductible?
The lesser of your payments or 25% of remuneration can be deducted on your business’s tax return for contributions to your employees’ SEP-IRAs. (Each employee’s compensation is limited and subject to annual cost-of-living adjustments.) There is a specific calculation to figure out the maximum deduction if you are self-employed and contribute to your own SEP-IRA.
What are the consequences to employees if I make excess contributions?
Employees’ gross income includes excess contributions. Employees who withdraw the extra contribution (plus profits) before the federal return due date, including extensions, avoid the 6% excise tax on excess SEP contributions in an IRA. After that period, any excess contributions left in the employee’s SEP-IRA will be liable to the 6% IRA tax, and the employer may be subject to a 10% excise tax on the excess nondeductible contributions. Find out what you can do if you’ve made a mistake by contributing too much to your employees’ SEP-IRA.
If my SEP plan fails to meet the SEP requirements, are the tax benefits for me and my employees lost?
If the SEP does not meet the criteria of the Internal Revenue Code, the tax benefits are usually lost. If you use one of the IRS correction programs to remedy the error, you can keep the tax benefits. In general, your correction should return employees to where they would have been if the failure had not occurred.
What are the rules for contributing to a SEP IRA?
The maximum contribution is restricted at 25% of an individual’s compensation per tax year (with a maximum of $57,000 in 2020 and $58,000 in 2021). Employees are unable to make additional contributions to their SEP accounts; their contributions are limited to the percentage specified by the company.
How much can an S Corp contribute to a SEP IRA?
The contribution restrictions are simple to understand. You have the option of contributing up to $57,000 or 25% of your yearly salary, whichever is less. If you have eligible employees, you must also contribute the same percentage to their accounts.
For example, the owner cannot make a 25% payment to himself and only a 10% contribution to qualifying employees.
How do I calculate my self-employed SEP contribution?
A SEP IRA allows you to contribute up to 25% of your adjusted net earnings from self-employment, or the yearly cash limit, whichever is smaller. Assume your total net earnings are $200,000. Multiply by 92.35 percent to get $184,700 in adjusted net earnings. To get your SEP contribution ceiling of $46,175, multiply $184,700 by 25%.
Is there a catch up contribution for SEP IRA?
SEP IRAs, which solely accept contributions from employers, do not allow catch-up payments. Employers can contribute to a typical IRA set up for their employees through a Simplified Employee Pension (SEP) Plan.
How much can a business owner contribute to a SEP IRA?
- Because they are simple to set up and maintain, SEP IRAs are appealing to the self-employed, freelancers, and small enterprises.
- Employers can contribute up to 25% of each qualifying employee’s gross annual salary and up to 20% of their net adjusted annual self-employment income if the individual is self-employed, as long as the total contribution does not exceed $58,000 per person in 2021 ($57,000 in 2020).
- Certain employees may be ineligible to participate in a SEP, such as those under the age of 21 or those earning less than $650 in earnings from your company in 2021 ($600 in 2020).
- Because it gives quick vesting, it does not allow loans to be taken out against it, and employees may be eligible after as little as a week, a SEP may not be desired.
Can a sole proprietor have a SEP IRA?
To prepare for retirement as a sole proprietor, you can normally select between two types of tax-advantaged plans: the SEP IRA and the individual 401(k). The SEP (Simplified Employee Pension) may be the answer if you’re looking for simplicity and ease of management.
Can I contribute to 401k and SEP IRA?
Question:Can I enroll in a 401(k) plan while also contributing to my SEP IRA if I have self-employment income from a different firm and am employed by an employer that offers one?
Yes, as long as the SEP IRA and the 401(k) plans are offered by different businesses. You can participate in both plans if you don’t own the company that pays you a W-2. If you have self-employment income from a business, you can set up a SEP plan even if you enroll in an employer’s retirement plan at a second job. The IRS SEP Frequently Asked Questions (FAQs) might help you learn more. Your contributions, however, are subject to some limitations.
Let’s take a further look at the limitations.
For 2020, your annual contribution to a SEP plan cannot exceed the lesser of 25% of your compensation or $57,000. Employer contributions are not eligible for catch-up contributions. For 2020, the maximum amount of self-employment pay is $285,000. The amount of compensation used for these reasons for self-employed individuals is your net earnings from self-employment less the deductible percentage of self-employment tax and the amount of your own retirement plan contribution deducted on Form 1040. These restrictions do not apply just to SEP plans. For all defined contribution plans, these are the total limits.
The cap for a 401(k) plan in 2020 is $19,500, plus a $6,500 catch-up contribution for those over 50. Contributions are limited to 100% of remuneration if these restrictions are less than a participant’s annual compensation.
What if the SEP plan and the 401(k) plans are offered by two different employers?
An individual can participate in both the SEP and the 401(k) plan if they are offered by two different employers (i.e., oneself, if self-employed, and an unrelated firm), up to the limits for each plan. Contributions to a SEP plan are not affected by 401(k) contributions.
What if they are offered by the same business?
If both plans are offered by the same company, the individual’s total contributions to both plans are limited to the lesser of $57,000 or 25% of net earnings from self-employment, excluding catch-up contributions from the $57,000 limit and salary deferrals from the 25% limit, excluding catch-up contributions from the $57,000 limit.
Consider contributing to a SEP plan and a 401(k) plan, if available, if you have self-employment income from a side business in addition to W-2 income from work. As a result, your retirement funds will be maximized. For additional information, contact a member of our staff today.
What can I do if I’ve exceeded my IRA contribution limit?
If you donate more than the standard or Roth IRA contribution limits, you will be charged a 6% excise tax on the excess amount for each year it remains in the IRA.