SEP Income Limits
The SEP IRA, or Simplified Employee Pension Individual Retirement Account is a tax-advantaged retirement savings plan designed for the small business owner and qualified under ERISA, or the Employee Retirement Income Security Act of 1974. Business owners contribute tax deductible dollars to SEP IRA plans to accumulate money for their own retirement savings, as well as for that of their employees.
Other People Are Reading
-
Income and Contribution Limitations
-
Congress imposes a two-tier test to limit contributions to SEP IRAs: The first is an overall contribution cap of $49,000 as of 2010; the second limits contributions to 25 percent of total compensation (not including SEP contributions). The IRS also imposes an additional formula on self-employed individuals, taking into account their required contributions to Social Security and Medicare. Additionally, when calculating SEP IRA contributions on an employees behalf, employers cannot use any income beyond $245,000 in their calculations. Furthermore, you cannot contribute property; only cash.
Structure
-
Generally, a business or business owner sets up an SEP IRA in order to benefit himself and certain employees. The IRS defines a "qualified employee" as one who is 21 years of age or older, who has worked for the employer in at least three of the last five years, and who has earned at least $550 from that employer. Employers can exclude union members whose retirement benefits, if any, are covered by a separate contract and certain nonresident aliens.
-
Tax Treatment
-
Contributions to an SEP IRA are tax-deferred. Plan sponsors get a current-year tax deduction on contributions made on workers' behalf, while employees are not taxed at all on salary deferred. Once in the SEP IRA, contributions grow tax-deferred as long as they are in the plan. There is no tax liability for dividend income, interest or capital gains incurred while the money was accumulating in the plan. Withdrawals after age 59 1/2 are taxed at ordinary income rates; early withdrawals are charged a 10 percent penalty except in certain limited cases of hardship or for funding education or purchasing a home for yourself or an immediate family member.
Considerations
-
Congress is encouraging business owners and the self-employed to take the initiative in saving for their own retirement, and has therefore authorized a tax credit of up to $500, designed to offset the start-up costs of setting up a plan. These plans are defined contribution plans -- the worker or contributor faces considerable risk if investments within the plan do not perform as expected. You may wish to tax diversify your sources of retirement income by dividing your assets into taxable and nontaxable sources. The SEP IRA income is taxable, as are 401k plans and traditional IRAs. Examples of nontaxable sources of income include Roth IRAs, Roth-designated accounts within 401k and 403b plans, and the cash value of permanent life insurance. This hedges against the risk of Congress raising income tax rates in the future and potentially keeps you in a lower overall marginal tax bracket.
-
