Simplified Employee Pension (SEP) IRA plans are the ideal way for self-employed individuals and small business owners to save for retirement and help their employees save for retirement.
The high SEP IRA contribution limits far exceed just about any other retirement accounts, such as Roth IRAs, which have fairly low annual limits. The high contribution limits, along with the tax-deferred growth, flexibility in administration and high deduction limits make SEP IRA plans the clear choice for people who own their own businesses. However, the only way you and your employees can benefit fully from a SEP IRA plan is to ensure that contribution limits are maxed out.
What are the SEP IRA Contribution Limits for 2013?
The SEP IRA contribution limits for 2013 have increased slightly over the limits for 2012. You are now able to contribute $51,000 or a maximum of 25 percent of your salary or your employees’ salaries, whichever is less to a SEP IRA plan. In 2012, the limit was set at $50,000 or 25 percent of employee salary, so the cap was raised $1,000 to compensate for inflation.
For example, if your employee’s annual salary is $100,000, you could contribute up to $25,000 to his or her SEP IRA. If he or she makes $225,000 per year, though, you could only contribute a maximum of $51,000, since 25 percent would be $56,250. Be aware that only the first $255,000 in annual income is considered for this calculation.
You should also note that these limits apply only to employer contributions. If your SEP IRA allows for non-SEP contributions, your employees will be able to make their own tax-deductible contributions up to $6,000 per year, depending on their age. Use this cheat sheet to help you determine the maximum contributions for your SEP IRA.
Why are SEP IRAs So Beneficial for the Self-Employed and Small Business Owners?
There are many reasons why self-employed individuals and small business owners might choose a SEP IRA over the other options they have for their retirement accounts. Here are some:
- Contribution flexibility – Employers do not have to make contributions to employees’ IRAs, but if they choose to, the amount they contribute is completely up to them. The business can decide not to contribute at all during a down year, but can contribute up to the SEP IRA contribution limits during the years of prosperity.
- Contribution limits – As mentioned above, the SEP IRA contribution limits are high when compared with other retirement options. In years when your business is thriving, you can reward your employees with significant contributions.
- Tax benefits – Unlike other retirement plans, the employer contributions to an SEP cannot be deducted from employee paychecks. However, you can deduct it from your annual taxes, which provides you with an added benefit at the end of the year.
- All employees get the same contribution – One nice aspect to SEP IRAs is that all employees benefit from the plan equally. You cannot give one employee a large contribution and your other employees small ones. This makes it easy for you to administer and places your employees on equal footing for their retirements.
What is the Deadline for SEP IRA Contributions?
You have until April 15 of the following year to meet your SEP IRA contributions limits for your employees. This means that the contribution deadline always coincides with deadline for filing taxes.
If you choose to make contributions for 2013 after January 1, 2014, however, you need to designate the contribution year so the IRS does not mistakenly apply toward the 2014 limits. You can put this information on the IRS Form 1040 or Form 1040a to take advantage of the full contribution time frame.
If you need to file an extension on your business taxes, you will also be filing an extension on your SEP IRA contribution deadline. You can contribute to your SEP IRA up until the business files its taxes for the previous year.
A SEP IRA can be extremely advantageous for both self-employed individuals and small business owners and employees. However, be sure you follow the IRS rules for setting one up and managing it to ensure you don’t lose any tax benefits afforded to you through the plan. It is also recommended that you revisit your plan on a yearly basis to make sure your plan is compliant with any change in rules.
Images courtesy of FreeDigitalPhotos.net