How Much Can I Contribute to My SEP IRA?

The SEP IRA contribution vary per year. For 2008 the figure is 25% of an employee’s compensation. This translates to less than $46,000. However there are other rules and stipulations you must know.

Eligibility and Qualifications

To qualify you must be at least 21 years old. The time spent with your employer should be 3 from the preceding 5 years. You can continue making contributions here even if you contribute to a Traditional IRA.

However deductions may be lowered or removed altogether under certain circumstances. It’s also possible to contribute to a Roth IRA. The amount and restrictions depend on certain dollar amounts.

The SEP IRA contribution has a fee of $15 annually. This is for balances below $10,000. A $2,000 minimum investment is also required.

Setting up an SEP

For employers they should fill out the IRS Form 5305-SEP-IRA Contribution Agreement. This is available from the IRS. After filling the form, it must be given to your employees. The contribution deadline for companies is 2 and a half months after the fiscal year. For everyone else it is the 15th of April.

Discretionary Basis

The contributions to be made are up to the employer’s discretion. The $46,000 limit could be expressed in other ways. That is, the contribution can be no more than 25% of the compensation. The cap is set at $230,000. Any SEP IRA contribution over this is not allowed.

If done properly, the employees will stand to receive tax deductions. These are of subject to various rules and IRS regulations.

Various Formulas

An employer can avail of different methods when making these contributions. One way is Pro-rata. Here, a single percentage is used for all employees. In the flat dollar scheme, the dollar amount is the same for everyone. Social security integration is different.

Those with larger salaries get higher contributions. The rules here vary, and employers utilize various calculations. Employees are not required to pay taxes for this type of SEP IRA contribution. Regardless of the formula, the tax deadline (April 15) must be met. If it is not, you may ask for an extension.

Deferral SEP

Before 1997, arrangements could be made for Salary Deferral SEP. Here an employee can choose to forego getting their compensation and placing it in the SEP. This can only be done pre tax. This is no longer possible to create. But those that did prior to 1997 may continue.

The rule stated that employers could qualify under certain requirements. Number one, half of the employees must agree to it. Second, if the salaries are high, they must be subject to review from the IRS. This will determine if it can be allowed.

Traditional IRA

A Traditional IRA must be set up by the employee so the SEP can be added. In some cases the Traditional IRA must be turned into a SEP. This isn’t always the rule, so it’s better to check with your employer.

The advantages it offers is the reason why SEP IRA contribution are very popular among employers and employees. Both can avail of it and the process is fairly straightforward.

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