SEP IRAs are designed to accomodate the earning potential of self-employed individuals and small business owners. As with Traditional IRAs, SEP IRA contributions may be deducted from your annual income for tax purposes. For example, if you earn $75,000 in a given year but also contribute $10,000 to your SEP IRA, you would only have to pay income taxes on $65,000.
If you make employer contributions to the SEP IRAs of your employees, you must contribute an equal percentage of income to each account. For instance, if "Employee A" makes $50,000 and you elect to contribute 10% of compensation ($5,000), you must contribute 10% of everyone's income in turn (i.e. 10% of $100,000 for "Employee B" = $10,000).
In calculating employer contributions, up to $280,000 in compensation may be considered in 2019. In 2020, up to $285,000 in compensation may be considered. To continue with our example, "Employee C" earns $300,000 and is due to receive the same 10% employer contribution as Employees A and B. However, Employee C's contribution will be capped at $28,000 (10% of $280,000) instead of $30,000 (10% of $300,000).
If you're a self-employed SEP IRA holder, calculating your contribution limit will be slightly more complicated. We encourage you to consult with an accountant or tax professional in determining your annual contribution abilities. You may also review SEP IRA information at IRS.gov.
|Tax Year||Annual Contribution Limit||Contribution Deadline|
|2019||The lesser of $56,000 or 25% of Compensation||Business tax filing deadline, plus extensions|
|2020||The lesser of $57,000 or 25% of Compensation||Business tax filing deadline, plus extensions|
Cash or assets that you transfer or roll from another qualified plan will not count against these annual limits. You can make a contribution to a new SEP IRA for a given tax year even if you open the account in the following calendar year.
EXAMPLE: You open a SEP IRA on February 1, 2020. You can still make 2019 contributions until the tax filing deadline (plus extensions) for your business even though your account was not open during the 2019 calendar year.
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