A few years ago I set up an SEP IRA, a retirement account designed for self-employed individuals and owners of small businesses. Frankly, it’s one of the best kept secrets for the self-employed.
An SEP IRA works similar to a traditional IRA or 401(k). Contributions are generally 100% tax deductible, and investments grow tax deferred. Withdrawals are generally taxed as ordinary income, and early withdrawals from an SEP IRA before you are 59 1/2 may incur a 10% penalty.
[Check out our List of Online Discount Brokers To House Your IRA.]
The big question for me was what the contribution limits are for an SEP IRA. And specifically, do contributions to a 401(k) affect how much can be contributed to an SEP IRS? So here’s what I learned from my accountant.
If you’re considering a traditional or Roth IRA, check out our 2010 IRA Contribution and Deduction Limits charts.
The contribution limit is calculated differently, depending on whether you’re self-employed or earn wages through your incorporated business. If you’re self-employed, the limit is 20% of your income before your self-employed tax deduction is included. If you earn wages recorded on a W-2, your limit is 25% of your income.
Regardless of your situation, though, you’re limited to a total contribution of $52,000 for 2014. If you contribute to other defined contribution plans, or if an employer matches some or all of your 401(k) contributions, those contributions reduce your $52,000 limit.
In other words, when you have an SEP IRA as a business owner or self-employed person, your total, across-the-board contributions to tax-advantaged retirement plans cannot exceed $52,000 for 2014.
Each year, the maximum contribution limit raises based on the annual Cost of Living Adjustment. As you can see from the table below, it’s pretty common for the limit to rise by about $1,000 per year..
Now, if you plan to set up a SEP IRA, consult with an accountant or other tax specialist before making any decisions. While I believe the above contribution limits to be accurate, I am not a tax specialist.
Here’s a quick summary of the limits:
Maximum Total Contribution
Percentage of Income Limitation
|2013||$51,000||25% / 20%|
|2012||$50,000||25% / 20%|
|2011||$49,000||25% / 20%|
|2010||$49,000||25% / 20%|
|2009||$49,000||25% / 20%|
I use Scottrade for my SEP IRA and the service and low fees have been great. I also like the fact that they have offices with real people who can answer inevitable questions that arise from time to time.