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SEP IRA Contribution Limits (2009 & 2010)
I recently met with my tax accountant to discuss, among other things, setting up an SEP IRA. An SEP IRA is a retirement account designed for self employed individuals and owners of small businesses. 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.
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.
For a self employed individual, the 2009 SEP IRA contribution limit is 20% of adjusted earned income, with a maximum contribution of $49,000. If you contributed to other defined contribution plans (e.g., 401(k), IRA), those contributions reduce your $49,000 limit. Also, if an employer matches some or all of your 401(k) contributions, the employer match also reduces your $49,000 maximum. Put another way, all of your investments in defined contribution plans cannot exceed $49,000. For 2010, the maximum SEP IRA contribution remains at $49,000.
If you run an incorporated business and are paid based on W-2 income, the contribution limit is 25% of that income. The $49,000 cap remains the same. Now, if you plan to set up an 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.
I'll be setting up an SEP IRA soon and will be describing which discount broker I've chosen to use. My plan is to be more aggressive with my SEP IRA than I am with my other retirement accounts. This will likely involve investing in individual stocks or bonds as well as some derivatives (most likely just call options).
- SEP-IRA and 401K–Can you contribute to both?
- FAQs from The Ultimate Guide to Traditional and Roth 401(k) and IRA Retirement Accounts
- Traditional IRAs and Roth IRAs: Here’s what’s new for 2008
- The Ultimate Guide to Roth and Traditional 401(k) and IRA Retirement Accounts
- Roth and Traditional 401(k): Why not invest in both?
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I ended up going with a Solo 401k, which was the best for my situation at the time. The aspect of the Solo 401k that I like is that I can contribute for my wife, who no longer works a day job. So I have her on the payroll and her salary can be used to fund her 401k. So not only is she earning for retirement, but she is also still contributing toward social security and earning those credits.
Another benefit of going with the Solo 401k is that you can contribute up to the $16,500 max, then contribute profit sharing to work toward your $49,000 limit. That allows some people to contribute more than they would otherwise be able to contribute with a SEP IRA because they can contribute the $16,500 baseline first, then contribute more. It’s a moot point though if your business is profitable enough to cover the $49k.
That’s the great thing about self-employed retirement accounts – there are many options and you can usually find a plan that will meet your needs.