How Much Can I Contribute to My SEP IRA

"How much can I contribute to my SEP IRA?" is a common question that many people have when establishing their SEP IRAs. While specifics may vary, the general contribution rules are the same for everyone.

A brief overview of a SEP IRA.
"SEP IRA" stands for "Simplified Employee Pension IRA." SEP IRAs are established and administered by your employer; this isn't an individual IRA plan. Not all employers utilize the SEP IRA; they often select a 401k plan in lieu of a SEP IRA. The biggest difference between the SEP IRA and a 401k plan is that, in a 401k, the employee contributes to the retirement plan, but in a SEP IRA, the only contributor is the employer.

W2 employees can't contribute to the SEP IRA.
As a W2 employee, you don't pay a penny into the SEP IRA. Because the SEP IRA is an employer-administered program, the employer is the one who makes contributions to the SEP IRA. Your employer may consider your SEP IRA contributions a part of your overall compensation package, but you never see a penny of that money; it's money that belongs to the employer and goes directly into the SEP IRA from the employer's pocket. However, if you receive any self-employment income, you can contribute to the SEP IRA.

How much can W2 employers contribute to your SEP IRA?
Exact contribution limits vary from year to year. In 2009, SEP IRA contribution was restricted to a maximum of $49,000. However, your W2 employer can also contribute only up to 25 percent of your total income to the SEP IRA. Therefore, if your income is $100,000, your employer could contribute a maximum of $25,000 to the SEP IRA, based on the limits, even though the theoretical maximum is higher than that.

Contribution limits for personal income employees.
If you receive a contribution as personal income, instead of on a W2 basis, your SEP IRA limits are different. Sole proprietorships, unincorporated LLCs or some partnerships may pay personal income instead of W2 income. If you receive a personal income, your maximum contribution is 20 percent of the net adjusted self employment income. As with W2 employees, you're still capped by an annual maximum of $49,000 in 2009, but that cap may not apply to 2010.

Determining limits for self-employed contributions.
If you're self-employed, you can still contribute to a SEP IRA. In order to figure your deduction limits, you must deduct half of your self-employment tax and the contributions to your SEP IRA from your net earnings for self-employment in order to determine your eligible limits. This is where things get complicated. Consider the following hypothetical example:

Net Earnings: $100,000
Half of Self-Employment Tax: -$5,000
SEP IRA Contribution: -$15,000

Total Eligible Income: $80,000

With an eligible income of $80,000, the maximum contribution at 20 percent would be approximately $16,000. These calculations can get extremely complicated, so consult your tax professional or accountant to make sure your numbers are accurate.

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