SEP IRA Contribution Limits and Deadlines

SEP IRAs allow self-employed individuals to save more.
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SEP IRAs are a great place for self-employed individuals and small business owners to save for retirement. The SEP IRA, or simplified employee pension individual retirement arrangement, is a fairly simple account to establish and manage with minimal paperwork and annual filing requirements. Businesses of any size, including self-employed, can establish and participate in a SEP IRA.

SEP IRAs provide the ability to make tax-deductible contributions and the earnings grow tax-deferred. Contributions to a SEP are treated as traditional IRA assets and as a result are subject to many of the same rules as traditional IRAs.

SEP IRAs offer funding flexibility from one year to another which is also a positive feature. If your business is having a stellar year, you can take advantage of high contribution limits. If it is a tight year, you can even choose not to make contributions in any given year.

SEP IRA Contribution Limits in 2019

One of the most appealing features of SEP IRAs are the high contribution limits. All SEP IRA contributions are considered employer contributions. If you decide to establish a SEP IRA, you can contribute as much as 25 percent of your net earnings from self-employment income for the year. SEP IRA contributions cannot exceed the maximum $56,000 in 2019. This amount is a slight increase from the 2018 contribution limit ($55,000) and will be subject to future cost of living adjustments.

Depending on your actual income, the SEP IRA contribution limit could be greater than the Individual Retirement Account (IRA) limits of $6,000 in 2019 ($7,000 for ages 50 or older). Also compare SEP IRA limits to the 401(k) contribution limit for employees, which is $19,000 in 2019 ($25,000 for ages 50 or older). Unlike IRAs and 401(k)s, SEP IRAs do not offer any catch-up provisions. But the good news is that the contribution limits are already pretty substantial.

Calculating Your Net Adjusted Self-Employment Income

Many self-employed individuals understand how complicated it can be to understand the income tax code. Calculating how much you can contribute to a SEP IRA requires a special formula. You can calculate your net adjusted self-employment income by determining your gross income and then subtract business expenses (including your SEP IRA contributions). The final step is to subtract half of your self-employment tax.

Vanguard provides a useful calculator to help you determine your maximum contributions to a SEP IRA. However, it is advisable to consult with a professional tax advisor if you have additional questions about how much you can contribute to a SEP IRA.

According to the IRS, you can make tax-deductible traditional IRA contributions to a SEP-IRA if your plan permits non-SEP contributions. However, the ability to deduct those contributions may be limited due to participation in the SEP.

SEP IRA Deadlines for 2018

SEP IRAs provide a rare last-minute tax savings opportunity to reduce your tax bill as a business owner. If you are self-employed or own a small business, a SEP IRA must be established by your company’s tax filing deadline (plus any extensions) for the tax year to which the qualifying contribution is made. For example, the tax filing deadline for many entrepreneurs and small business owners for the 2018 tax year is April 15, 2019. Requesting an extension will extend the tax filing deadline until October 15, 2019. It is important to remember that filing an extension does not provide an extension to pay any taxes that will eventually be due.

SEP IRA contributions can be made for last year (2018) until the tax filing deadline of April 15, 2019. Filing an extension will allow you to delay filing a tax return until October 15, 2019. You will still have time to establish a SEP IRA and make a SEP IRA contribution until the tax filing deadline. Be sure to notify the IRA custodian to code the contribution for the prior year (2018) if that is your intention.

There are other retirement plans for small businesses and self-employed individuals, such as SIMPLE IRAs, individual or solo 401(k)s, Keoghs, or even regular 401(k)s for small businesses. It makes sense to compare them all before deciding which one is right for you.

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