SEP IRA

Archive for the ‘SEP IRA Contributions’ Category

Question: I am self-employed, no employees- other than IRA what other retirement plan can I have.?

Can I set up a SEP-IRA which allows a higher Contribution?

Answer: sure and you should do it!!!

Question: Why is there a SEP IRA compensation limit?

I am at a new company and they offer a SEP IRA plan for me to contribute to. I
was reading over the rules for a SEP IRA and I had a question about the
Contribution limits. The rules I saw for 2006 show that a person can contribute
is 25% of their compensation or $44,000. I saw there is a salary cap of
$220,000. I was wondering why there is a salary cap that high because $44,000
is 25% of $176,000. Is there a reason for the salry cap and if there is, what is
it?

Answer: SEP-IRA Deducton and Contribution Limits
Today’s tax question comes from D. Singleton in Texas. He asks:
“Your article SEP, SIMPLE, Retirement Plan Contribution Deduction contains the following quote: ‘Limits: Your maximum Contribution to a SEP-IRA is 20% of your self-employment income or $42,000, whichever is less.’ Shouldn’t this be 25%? Everything else I’ve read says 25%. Please clarify.”

You can contribute 25% of your wages to a SEP-IRA, if you are an employee participating in your employer’s retirement plan.

If you are self-employed, however, you do not have wages. Instead, you have net profits from the business venture. Self-employed people can contribute 20% of your net profits* up to $42,000 (increases to $44,000 for 2006). Now net profits for the SEP-IRA are calculated differently. You take your net self-employment income and subtract one-half of your self-employment taxes. The resulting “net net” self employment income is then multiplied by 20% to get your Contribution amount.

This lower 20% rate is well-documented in IRS Publication 560, Retirement Plans for Small Business. See the section on Contribution Limits, and scroll down to “Tax treatment of excess contributions.”

J.K. Lasser’s Your Income Tax has an excellent chapter on retirement plan options for self-employed people. You will want to read chapter 41 of the JK Lasser book to learn more about SEP and other retirement plans.

Fidelity Investments has an excellent SEP-IRA calculator to determine your maximum Contribution. I am in no way recommending you invest through Fidelity. I just like using their calculator.

One final tip. You have until your final deadline, including extensions, to contribute to a SEP-IRA for last year. So if you file an extension, you will have until October 16, 2006, to fund your SEP-IRA for last year. However, you do have to fund the SEP before you file your tax return. If you don’t file for an extension, the last day you can contribute to a SEP would be April 17, 2006.

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Question: Self Employed or Employee (for SEP IRA)?

I’m confused with the SEP IRA Contribution limits for me. I’ve an S Corp. I’m 100% owner and a single employee of my company. My company pays me wages and pay owner’s drawing/distribution. It gives me a W-2 and K-1 at the end of the year. For the SEP IRA purpose, am I classified as a self-employed person or an employee? Which limits do apply on my 2008 SEP Contribution—20% of net earnings limit or 25% of compensation limit?

Answer: 25% of compensation shown on the W-2.

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