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.
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.
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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 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 $54,000 for 2017. The big question is this: do contributions to a 401k at work reduce this $54,000 limit? I believe the answer is no.
Initially, my accountant advised me that my workplace retirement contributions did reduce the amount I could contribute to a SEP IRA. For several years I followed his advice. Then on a call with Fidelity, I was informed that this was wrong. Because my day job is completely unrelated to my business, Fidelity told me that my 401k contributions do not affect my SEP IRA limits.
I passed this on to my accountant. He did some research and concluded that Fidelity was right! I believe the issue is now settled, however, there is one more piece to this puzzle.
For the Dough Roller Money Podcast, I interviewed a Fidelity representative about small business retirement plans. During the interview he contradicted what Fidelity had previously told me.
In the final analysis, I believe my accountant and the first Fidelity rep are correct. It’s my understanding that employer contribution limits are per plan, while employee contribution limits are per employee. The SEP IRA contribution is an employer contribution (Source: IRS).
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:
|Year||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 have used 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.Topics: Retirement Planning