A few years ago I set up an SEP IRA. A SEP IRA is 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.
A 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.
For a self employed individual, the 2012 SEP IRA contribution limit is 20% of adjusted earned income, with a maximum contribution of $50,000 (Source: IRS). If you contributed to other defined contribution plans (e.g., 401(k), IRA), those contributions reduce your $50,000 limit. Also, if an employer matches some or all of your 401(k) contributions, the employer match also reduces your $50,000 maximum. Put another way, all of your investments in defined contribution plans cannot exceed $50,000. For 2013, the maximum SEP IRA contribution increases to $51,000.
If you run an incorporated business and are paid based on W-2 income, the contribution limit is 25% of that income. The $50,000 cap remains the same. 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.