A SEP IRA (Simplified Employee Pension) is a type of IRA provided by financial institutions for business owners to provide themselves and their employees with retirement benefits. SEP IRA’s are set up as traditional IRA’s, so funds can be invested the same way. Just like any IRA, SEP IRA’s provide tax benefits and allow you to save for your future retirement. Employers and business owners can set restrictions as to which of their employees qualify for the IRA, but the IRS does set a limit on these restrictions. The IRS also sets SEP IRA contribution limits. The strictest conditions allowed by the IRS are:
• employee must be 21 years of age to qualify for contributions.
• employee has to have worked for employer for three of the previous five years.
• employee must have received at least $600 in pay for the tax year.
Employers and business owners are allowed to use less restrictive measures if they choose.
SEP IRA Contribution Limits
There are a few SEP IRA rules set in place that limit the amount that you can contribute or that an employer can contribute to an SEP IRA.
• An employer is allowed to contribute up to 25 percent of an employees income to the SEP IRA account. There is a cap to the amount that can be contributed that is set by the IRS annually.
• SEP IRA contribution limits are set by the IRS and function differently when contributions are being made to an employee versus contributions being made to a personal account when self employed.
• The 25 percent cap applies to wages and not adjusted profit.
• Self employed business owners pay themselves wages and make their own IRA contributions. Because of this and a few other factors, their limit is set around 18.6 percent.