SEP IRA Contribution Limits for 2014

There's a Limit to What You Can Put in Your 2014 SEP IRA

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If you work for yourself, a SEP IRA is an easy way to save for your own retirement. SEP IRA stands for simplified employee pension individual retirement accounts. It's a mouthful, but the key word here is simplified. Opening a SEP IRA is as easy as making a phone call to your favorite brokerage or investment firm. The money you put into a SEP IRA can be taken directly off the top of your taxable income, potentially reducing your annual income tax bill.

And with the SEP that potential to save is meaningful. The contribution limits for SEP IRAs are higher than comparable plans, which makes them great for highly compensated people looking to reduce their taxable income while feathering their retirement nest.

*Note: The SEP IRA contribution limits have changed since the 2014 tax year.  If you are looking for SEP IRA limits for the current tax year, you can find them quickly using the link below:

SEP IRA Contribution limits for 2016

If you are looking for prior tax year limits, find them quickly at:
SEP IRA Contribution Limits for 2015

SEP IRA Contribution Limits 2013
SEP IRA limits for 2012

SEP IRA Contribution Limits 2014

If you have a SEP IRA, or are thinking of opening one, the limit on how much you could contribute in 2014 was up to 25% of your total income or 20% of adjusted income, up to a maximum of $260,000 in income. That means the limit was $52,000 for the 2014 tax year.

There's no catch-up contribution offered with a SEP IRA but, with these limits, who needs them? Compare this to the $23,000 maximum for a 401(k) plan with a catch-up contribution in 2014, and you get the idea why a SEP is the choice for investors who want to make the most of their annual contribution.

You may be laughing right now at the concept of putting away $52,000 for retirement. I get it, but even if you put away a small portion, a SEP IRA is a great place to save. Part-timers, freelancers and moonlighters can use SEP IRAs to bank some of their secondary income. Even if you already have a 401(k) at work that you contribute to, you can save in a SEP IRA at the same time. If you decide not to contribute one year, skip it. If you don't want to itemize your taxes, you don't have to. A SEP IRA deduction is known as an above the line deduction, which means you just take it right off the top of your income. This can be done without itemizing. As I said, the key word is simplified.

SEP IRA Basics 2014

The contribution limits are one of the small differences between SEP IRAs and other types of retirement plans. You put the contribution into the SEP, then invest that money in mutual funds, target date funds, stocks, bonds, real estate investments—it's really up to you. The money in the fund grows without being tax each year, which helps it accumulate more quickly in good years (and can make the down years not as bad). You do pay taxes when you start to take the money out, ideally after retirement between age 60 and 70.

Pull the money out before and, as with other retirement accounts, you will likely to be subject to a 10% penalty fee and you'll pay all applicable federal, state and local taxes on the money. Plus you lose the value of continued tax-deferred wealth accumulation.

Taxes and SEP IRAs in 2014

One of the cool things about a SEP IRA is that it's a good tax savings vehicle that is there for you whether you plan ahead or decide to contribute at the last minute. Open a SEP IRA right before you file your taxes (and we are talking days before), and you can take that money as a deduction for the year. You must deposit the contribution amount by the due date, meaning April 15, 2015. If you file an extension, you have until the deadline of the extension to contribute. That means you could lower 2014 taxes with a deduction made as late as October 15, 2015.

This remains possible for future tax years in which you choose to file an income tax extension.

To figure out your net adjusted self-employment income, the IRS recommends taking your gross income, subtract business expenses (the tricky part is that business expenses should include SEP IRA contributions) and subtract half of the self-employment tax.

SEP IRA Contributions for Employees in 2014

SEP IRAs are slightly more complicated for small business employers who offer them to employees. That's because, with a SEP, employers are required to contribute the same salary percentage for all employees. If you want to put in 10%, all of your employees must put in 10%. Compare a SEP to other types of small-business retirement plans to determine what is right for you company.

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