How to Determine a Maximum SEP IRA Contribution
Being your own boss has many advantages. Along with the additional responsibility comes the need to take care of your own retirement contributions. The Simplified Employee Pension (SEP) IRA is designed for small business owners. There's little red tape and paperwork involved, and it works best for those who have very few or no employees at all.
- Difficulty:
- Moderate
Instructions
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Remember that contributions are fully deductible on the small business owner's taxes. Contributions also have the potential to grow tax-deferred, which is great news for those looking for a comfy retirement.
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Determine the maximum contribution allowed by knowing your status. Employees involved in a SEP IRA can contribute up to 25 percent of their wages. Owners and self-employed participants who take net profits from their company can contribute up to 20 percent of their net profits, rather than income.
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Calculate net profits. Take net self-employment income and subtract half of self-employment taxes. This equals "net" self-employment income and multiplied by 20 percent gives the maximum contribution amount.
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Know the maximum contribution for the most recent tax year. Currently it's at $44,000, but check this figure by visiting the IRS website or calling your accountant.
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Contribute before it's too late. Some choose to put money in their SEP IRA on a monthly basis while others wait until the end of their fiscal year to contribute in one lump sum. The deadline for contributing for a tax year is the same as the tax-filing deadline, so it should be easy to remember.
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