SEP Maximum IRA Rules
If you work for someone else, you probably have access to a 401k plan to help you save for retirement. But if you are self-employed you need to develop your own plan for a comfortable retirement. One of the best tools self-employed individuals have is the SEP-IRA, but in order to use it properly you need to understand, and abide by, the contribution limits.
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Self-Employment Income
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When contributing to an IRA, it is important to know what types of income you can contribute to the plan. In the case of a SEP-IRA, you may only contribute money you earned as a self-employed individual. Unearned income, like money you earned on your stocks, bonds or bank accounts, does not count and cannot be used to figure your maximum SEP-IRA contribution. Hopefully you have been keeping excellent records and know exactly how much you earned from self-employment activities. You can start with the money reported on your 1099-R statement, but if you have additional income you need to report that to the IRS as well. Any money you earn from self-employment income can be used to figure your maximum allowable SEP-IRA contribution.
Maximum Contribution
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The maximum dollar amount self-employed individuals can contribute to a SEP-IRA changes from time to time, so it is always a good idea to check with the Internal Revenue Service, or with your CPA, before making your yearly contribution. For the 2010 tax year, self-employed individuals can contribute a maximum of 25 percent of their compensation, up to a limit of $49,000. This generous contribution limit is one of the chief selling points of the SEP-IRA.
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Employee Contributions
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The SEP-IRA is designed to allow small business owners and self-employed individuals to put money aside for retirement. As such, only the employer, or the self-employed individual is permitted to contribute to a SEP-IRA plan. If the business does have outside employees, those workers are eligible to open and fund traditional IRAs. As with the SEP-IRA, the contribution limit for these employee's IRAs will change from time to time. For the 2010 tax year younger workers can contribute up to $5,000, and workers 50 years of age and older can contribute an extra $1,000, for a total annual contribution of $6,000.
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References
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