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What Are the Contribution Limits for My SEP IRA?

SEPs contain only employer contributions, and they must contribute the same percentage of every employee’s compensation. As of 2016, an employer may contribute the lesser of either 25% of an employee’s compensation or $53,000 annually.

An important thing to note is that the employer decides whether to contribute to the employees’ SEP IRA each year; the employer is not required to make continuous yearly contributions. The equal treatment of all employees with respect to the retirement plans is a fundamental principle of all employer-sponsored retirement programs.

If an owner-employee of a pass-through entity wants to contribute to his own SEP, he may find that his contribution limits are lower than the 25%/ $53,000 limits. This is due to a formula which requires half of the so-called self-employment tax to reduce the amount of income included in the calculation.

The effective contribution limit for sole proprietors is generally about 18.6% of net profit. Please consult a tax professional if you need more clarification. In a sole proprietorship, the owner may be better served by an Individual 401(k) plan, which also has low administrative costs.

Keywords: taxation, retirement accounts, saving for retirement, self-employment tax, employer contributions, individual 401(k), employer-sponsored retirement plans,
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