Are you a small business owner or professional trying to maximize your SEP IRA? The next obvious question is about SEP IRA contribution limits. SEP IRAs are popular among small businesses because of their relatively high contribution limits.
But what if we tell you that instead of putting away $57,000 a year, you can contribute more than $100,000 to your retirement fund?
At Emparion, we help businesses streamline their retirement strategy through a qualified defined benefit plan or cash balance plan. Not only are we going to help you maximize your retirement savings, but we’ll help you cover up for all the lost years through mega-contributions. But let’s touch on that a little later and start with an overview of SEP IRA plans.
A Case for SEP IRA: Plan features, SEP IRA contribution limits
SEP (Simplified Employee Pension) IRAs represent an excellent retirement saving opportunity for small business owners. They are simple to establish and maintain in comparison to other plans, such as 401k.
In order to establish a SEP IRA, you must either own a business, have employees, be self-employed, or have freelance income.
Some critical features of SEP IRA plans include:
- Only employers can contribute to a SEP IRA: The IRS allows only employers to contribute to a SEP IRA. It is critical to note that there are no annual contribution requirements in a SEP-IRA plan, providing financial flexibility to the employer. If employees want to contribute to an IRA, they can open one separately.
- Contribution deadline: The contribution deadline for SEP IRAs is the same as the tax-filing deadline, including any extensions. It is critical to note that you have to make the contributions for all eligible employees and yourself within this timeline.
- Contribution to the accounts of qualified employees: SEP IRA requires the employer to include eligible employees into the plan. Eligible employees include those who are above 21 years, have worked for the employer for three out of the last five years, and have earned $600 or more in a year. The employer has to make equal-percentage contributions to the SEP IRAs of all eligible employees.
- Self-employed professionals can establish SEP IRAs: Self-employed professionals can open a SEP-IRA plan and contribute annually to the plan. The contribution guidelines for self-employed professionals are slightly different. You can check IRS Publication 560 for more information.
SEP IRA Contribution Limits for 2020
Let’s find out SEP IRA Contribution limits for individual employees.
As per the IRS guidelines, you can contribute the lesser of
- 25% of an employee’s pension; or
- $57,000 for 2020 ($56,000 for 2019).
You have to make proportional contributions to the SEP IRAs of all the eligible employees.
Sample Study for SEP IRAs
Case A: Cassey works for Pioneer Computers and has an annual income of $60,000. If you, as the employer, decide to contribute 20% to each employee’s SEP IRA, Cassey will receive yearly contributions of $12,000.
Case B: Peter is an executive director at Paramount Graphics and earns in excess of $300,000 annually. If you decide to contribute 25% to each eligible employee’s SEP IRA, you’ll contribute a maximum of $56,000 to Peter’s account in 2019 because of the upper contribution limits set forth by the IRS.
How to calculate SEP IRA Contribution limits
- Create a list of all eligible employees for SEP IRA contributions.
- Set a percentage contribution figure for your SEP-IRA and that of your employees.
- If you decide to contribute 5% to each employee’s plan, calculate respective contributions for employees.
- For instance, if Stella has an annual income of $45,000, you’ll have to contribute $2,250 to her SEP-IRA.
- Make contributions before the tax-filing deadline (April 15). If you’ve applied for extensions, the final contribution deadline will be October 15.
Why Cash Balance Plans excel against SEP IRAs?
Now that you understand the SEP-IRA contribution limits let’s find out how you can boost your retirement savings 4x.
Emparion excels in providing cash balance plans and similar defined benefit plans to small businesses, entrepreneurs, and self-employed professionals.
Here is why we recommend cash balance plans to our clients:
- High contribution limits in comparison to SEP IRAs, up to $300,000 for 2020.
- You can combine cash balance plans with 401(k) plan, boosting your contributions further.
- You get the ability to create a custom plan in accordance with your retirement needs.
How to correct contribution errors in a SEP IRA?
Did you commit a mistake while contributing to your employees’ SEP IRA? Don’t worry; it’s not uncommon to find such errors.
In case of excess contributions, the IRS allows you to correct your contribution mistakes. The first option requires you to distribute the excess contribution from the employee’s SEP IRA to the employer.
Under the second option, if you made a contribution under the VCP program, you might be able to retain the amount in the SEP-IRA if you are willing to pay a sanction amount to the IRS. The amount will be 10% of the excess contribution made into the SEP-IRA.
Bottom Line
Offering financial protection to your employees through a SEP-IRA plan can help you attract and retain talent. Unlike individual IRAs or 401k plans that require employee contribution and offer matching-contributions at the most, SEP IRAs help you stand out as an employer.
SEP IRAs are a good retirement option for entrepreneurs, freelancers, and professionals aiming to contribute modest amounts to their retirement plans.
Most of our clients start with SEP IRAs and later shift to high-contribution plans such as cash balance plans. We recommend clients to evaluate their retirement goals and choose a retirement solution accordingly.
