SEP-IRA Contribution Limits and Deadlines
Learn the latest contribution limits and deadlines for SEP-IRAs
The Simplified Employee Pension Individual Retirement Arrangement (SEP-IRA) is a great place for self-employed individuals to direct money for retirement. But it's important to learn—and stay within—the legal contribution limits and deadlines.
Basics of SEP-IRAs
SEP plans provide business owners with a vehicle for saving for retirement for themselves and their employees. Businesses of any size, including self-employed individuals, can establish and contribute money for each employee of the business to a SEP-IRA. It's a fairly simple retirement account that you can establish and manage with minimal paperwork and no annual filing requirements.
SEP-IRAs give investors the ability to make tax-deductible contributions and grow the earnings from those contributions on a tax-deferred basis—neither the initial contribution nor the gains will be taxed until you withdraw them in retirement. SEP-IRAs also offer funding flexibility from one year to another—a win for a business with fluctuating fortunes. You can invest up to the SEP-IRA contribution limits if your business is having a stellar year. You can choose not to make any contributions if it's a tight year.
Contributions to a SEP-IRA are legally treated as traditional IRA assets, and they're subject to many of the same rules as traditional IRAs as a result.
SEP-IRA Contribution Limits
One of the most appealing features of SEP-IRAs is the large amount you can put away for retirement. All SEP-IRA contributions are considered employer contributions on behalf of employees. You can contribute up to the lesser of:
- 25% of employee compensation
- $58,000 in 2021
If you're contributing on behalf of other employees of the business, you have to contribute the same percentage of compensation for all employees. Your compensation is your adjusted self-employment income for the year if you're a self-employed individual contributing to your own SEP-IRA.
The annual limit will be subject to future cost of living adjustments. The high contributions potential of the account may allow you to put away more money for retirement in an SEP-IRA than you could in a traditional IRA. This is because the SEP-IRA contribution limits may be greater than the Individual Retirement Account (IRA) IRA limit of $6,000 in 2021 ($7,000 for people aged 50 or older), depending on your actual income.
Also compare SEP-IRA limits to the 401(k) contribution limit for employees, which is $19,500 ($26,000 for ages 50 or older) in tax year 2021. Unlike IRAs and 401(k)s, SEP-IRAs do not offer any catch-up provisions. But the good news is that the SEP-IRA contribution limits are already high.
Calculating Your Net Adjusted Self-Employment Income
Self-employed individuals will have to use their net adjusted self-employment income as compensation when calculating the SEP-IRA contribution limit of 25% of compensation. Use this special formula to calculate your net adjusted self-employment income:
- Determine your gross income.
- Subtract business expenses (including your SEP-IRA contributions).
- Subtract half your self-employment tax.
Vanguard provides a useful calculator to help you determine your maximum contributions to a SEP-IRA. It's advisable to consult with a professional tax advisor, however, if you have additional questions about how much you can contribute to a SEP-IRA.
Employees can also make tax-deductible traditional IRA contributions to a SEP-IRA if the plan allows for non-SEP contributions. But the ability to deduct those contributions may be limited or eliminated because of your participation in the SEP.
Contribution Deadlines for SEP-IRAs
Like traditional IRAs, SEP-IRAs provide a last-minute tax savings opportunity to reduce your tax bill as a business owner, but you must adhere to the SEP contribution deadlines to reap those savings at tax time. 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 if you're self-employed or own a small business.
For example, the tax filing deadline for many entrepreneurs and small business owners for the tax year is generally April 15. Requesting an extension will extend the tax filing deadline, usually until October 15. It's important to remember that requesting a filing extension does not provide an extension on paying the taxes that will eventually be due.
The IRS announced in February 2021 that the deadline for 2020 IRA contributions has been pushed back from April 15 to June 15, 2021 for all residents in Texas. This announcement was made in response to the 2021 winter storm which has been declared to be a disaster, and it applies to tax payments as well. Areas in other states might also qualify for this extension if their locations are declared to be disaster areas.
Similar SEP-IRA contribution deadlines apply when depositing funds into a SEP-IRA. SEP-IRA contributions can be made for last year until the tax filing deadline. Filing an extension will generally allow you to delay filing a tax return until October 15. 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, if that's your intention.
Keep SEP-IRA Contribution Limits in Context
There are other retirement plans for small businesses and self-employed individuals, such as SIMPLE IRAs, individual 401(k)s, Keoghs, or regular 401(k)s. It makes sense to compare the various retirement options for small businesses and decide which one is right for your needs before establishing an SEP-IRA and contributing your hard-earned money according to these contribution limits and deadlines.