The SEP IRA is a retirement plan designed to benefit self employed individuals and small business owners. Sole proprietorships, S and C corporations, partnerships and LLCs qualify.
The 2015 SEP IRA contribution limit is $53,000 (2014 limit is $52,000). Contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred. Withdrawals after age 59 ½ are taxed as ordinary income. Withdrawals prior to age 59 ½ may incur a 10% IRS penalty as well as income taxes.
A SEP IRA has broad appeal due to its high annual contribution limits, completely discretionary and flexible annual contributions and minimal administration. SEP IRA plans can be established by a one person business or by a business owner with employees.
The calculation of how much can be contributed to a SEP IRA is dependent on whether your business is a corporation and you receive a W-2 as compensation or if you are taxed as a sole proprietorship and receive compensation as personal income. Examples of both are shown below.
Business owner receives compensation as W-2 income
An S or C corporation, an incorporated partnership or a LLC electing to be taxed as a corporation pays the business owner a W-2 salary. In this situation, the annual SEP IRA contribution can be between 0% to 25% of the owner's W-2 salary up to the SEP IRA contribution limit. SEP IRA contributions are generally 100% tax deductible as a business expense.
Business owner receives compensation as personal income
When a SEP IRA is established for a unincorporated business such as a sole proprietorship, unincorporated partnership or a LLC electing to be taxed as a sole proprietorship, annual contributions are made into your SEP IRA account between 0 to 20% of your net adjusted self employment income (or net adjusted business profits). SEP contributions are flexible and the percentage of contribution can be changed at any time and may be skipped in a bad year. SEP IRA contributions are generally 100% tax deductible from personal income.
Net adjusted self employment income is calculated by taking gross self employment income and then subtracting business expenses and then subtracting 1/2 of the self employment tax. An annual SEP IRA contribution can be made between 0% to 20% of that figure up to the annual SEP IRA contribution limit.
SEP IRA contributions are flexible and the percentage of contribution can be changed at any time. SEP IRA contributions are generally 100% tax deductible from personal income.
To determine how much you can contribute to a SEP IRA based on your income use the interactive SEP IRA calculator.
Generally a SEP must be established and funded by your tax filing deadline. Generally, filing extensions extends the period for establishing and funding the SEP plan. For a sole proprietor April 15th would be the deadline to establish and fund a SEP for the prior tax year. If an extension was filed a sole proprietor can establish and fund a SEP IRA by October 15th.