A SEP IRA, or Simplified Employee Pension IRA, is a tax-advantaged retirement plan for people who are self-employed or run a small business. SEP IRA contribution limits determine how much you can contribute to the account each year.
The IRS sets contribution limits for SEP IRAs and adjusts them annually for inflation. SEP IRA contribution rules permit employers to make contributions to their own or their employees’ SEP accounts; employees do not contribute to a SEP.
Key Points
• SEP IRAs offer a tax-advantaged way to save for retirement, beneficial for self-employed and small business owners.
• It’s possible to contribute as much as $69,000 to a SEP IRA in 2024, an increase from the previous year.
• For 2024, employers can contribute up to the lesser of 25% of an employee’s compensation or $69,000 to a SEP IRA.
• Contributions to SEP IRAs are tax-deductible and must be reported on IRS Form 5498.
• Since contributions to SEP IRAs are made with pre-tax dollars, qualified withdrawals are subject to ordinary income tax.
What Is a SEP IRA?
A SEP IRA is a tax-advantaged retirement account that allows employers to make contributions on behalf of employees. Businesses of any size can establish a SEP IRA, including self-employed individuals who have no employees.
SEP IRAs are subject to the same tax treatment as traditional IRAs. Specifically, that means:
• Contributions to a SEP IRA are tax-deductible for employers or self-employed individuals
• Qualified withdrawals are subject to ordinary income tax since SEP IRAs are funded with pre-tax dollars
• Early withdrawals before age 59 ½ may be subject to taxes and penalties
• Required minimum distributions (RMDs) are required at age 73 (assuming you turn 72 after Dec. 31, 2022).
The SECURE 2.0 Act permits employers to offer employees a Roth SEP IRA option, though they’re not required to. It’s also possible to convert a traditional SEP IRA to a Roth IRA, to get tax-free retirement withdrawals. However, the account owner would have to pay tax on earnings at the time of the conversion.
SEP IRA Contribution Limits for 2024
Once you open an IRA, it’s important to be aware that the IRS determines the maximum SEP IRA contribution limits each year. For 2024, it’s possible to contribute as much as $69,000, up from the maximum limit of $66,000 in 2023.
Unlike traditional or Roth IRAs, catch-up contributions are not allowed with SEP IRAs.
Here are the details on how the 2024 SEP IRA contribution limits work.
Maximum Contribution Amounts
The SEP IRA max contribution by employers for 2024 is the lesser of the following:
• 25% of an employee’s compensation
OR
• $69,0003
This limit applies to employers who make contributions on behalf of employees. As noted above, employees cannot make elective salary deferrals to a SEP IRA the way they can with a traditional or Roth 401(k) plan.
If you’re self-employed your SEP IRA contribution limits for 2024 are the lesser of:
• 25% of your net self-employment earnings (see how to calculate net self-employment earnings below)
OR
• $69,0004
Self-employed individuals may want to compare a solo 401(k) vs SEP IRA to decide which one offers the most benefits in terms of contribution levels and tax advantages.
Calculation Methods and Factors
Whether you’re an employer or a self-employed individual dictates how you calculate the amount you can contribute to a SEP IRA.
According to SEP IRA rules, employer contributions are based on each employee’s compensation. The IRS limits the amount of compensation employers can use to calculate the SEP IRA max contribution for the year.
For 2024, employers can base their calculations on the first $345,000 of compensation. As with the SEP IRA contribution limit, the IRS adjusts the compensation threshold annually.
In addition, contribution rates are required to be the same for all employees and the owner of the company. So if you’re a business owner who is contributing a certain amount to your own account, you must contribute funds at that same rate to your employees.
If you’re self-employed, you’ll need to calculate your net earnings from self-employment less the deductions for:
• One-half of self-employment tax
AND
• Contributions to your own SEP IRA
Net earnings from self-employment is the difference between your business income and business expenses. For 2024, the self-employment tax rate is 15.3% of net earnings, which consists of 12.4% for Social Security and 2.9% for Medicare.
Strategies for Maximizing SEP IRA Contributions
Maximizing SEP IRA contributions comes down to understanding the annual contribution limit and the deadline for making contributions.
The IRS releases updated SEP IRA contribution limits as soon as they’re finalized to allow employers and self-employed individuals sufficient time to plan. You’ll have until the annual income tax filing deadline each year to make contributions to a SEP IRA on behalf of your eligible employees or yourself, if you’re self-employed.
Once you open an investment account like a SEP IRA, you can make monthly contributions or contribute a lump sum to meet the max SEP IRA limit for the year. If you’re self-employed, you may find it helpful to contribute something monthly and then make one larger lump sum contribution just ahead of the tax filing deadline once you’ve had a chance to calculate your net earnings from self-employment.
This strategy could mean that you miss out on some earnings from compounding returns since you’re putting in less money throughout the year. However, it may prevent you from making excess contributions to your SEP IRA, which can result in a penalty.
Recommended: What is a Self-Directed IRA?
Potential Changes and Updates for Future Years
SEP IRA contribution limits don’t stay the same each year. The amount you contribute for 2024 will likely increase for 2025. Staying on top of changes to the contribution limits can ensure that you don’t miss out on opportunities to maximize your SEP IRA.
Cost-of-Living Adjustments (COLAs)
Internal Revenue Code (IRC) Section 415 requires annual cost of living increases for retirement plans and IRAs. Cost-of-living adjustments are meant to help your savings rate keep pace with the inflation rate.
These COLA rules apply to:
• SEP IRAs
• SIMPLE IRAs
• Traditional and Roth IRAs
• 403(b)plans
• Profit-sharing plans
The IRC also applies COLAs to Social Security benefits to ensure that people who rely on them can maintain a similar level of purchasing power even as consumer prices rise.
Monitoring IRS Announcements
The IRS typically announces COLA limits and adjustments in November or December of the preceding year. For example, the IRS released the Internal Revenue Bulletin detailing SEP IRA contribution limits for 2024 and other COLA adjustments on November 20, 2023.
These bulletins are readily available on the IRS website. You can review the latest and past bulletins on the IRS bulletins page.
Compliance and Tax Implications
SEP IRAs are fairly easy to set up and maintain, but there are compliance rules you will need to follow. As an employer, you’re not required to make contributions to a SEP IRA for eligible employees every year, and if you are self-employed, you are not required to make yearly contributions to your own SEP. However, if you make contributions on behalf of one eligible employee, you have to make contributions on behalf of all eligible employees.
And remember, the contribution percentage you use to calculate the SEP IRA maximum for each employee, and for yourself as the business owner, must be the same.
Reporting SEP IRA Contributions
SEP IRA contributions must be reported on IRS Form 5498. If you’re using tax filing software to complete your return you should be prompted to enter your SEP IRA contributions when reporting your income. The software program will record contributions and calculate your deduction for you.
There’s one more thing to note. Contributions must be reported for the year in which they’re made to the account, regardless of which tax year the contributions are for.
Excess Contribution Penalties
The IRS treats excess SEP IRA contributions as gross income for the employee. If you make excess contributions, the employee would need to withdraw them, plus any related earnings, before the federal tax filing deadline.
If they fail to do so, the IRS can impose a 6% excise tax on excess SEP IRA contributions left in the employee’s account. The employer can also be hit with a 10% excise tax on excess nondeductible contributions.
The Takeaway
For small business owners and the self-employed, SEP IRAs can be a good way to save and invest for retirement. Just be aware that SEP IRA rules are more complicated than the rules for other types of IRAs when it comes to contributions and deductions. If you’re contributing to one of these plans for your employees, or for yourself as a self-employed business owner, it’s important to know how much you can contribute, what each year’s contribution limits are, and when contributions are due.
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FAQ
What is the maximum SEP IRA contribution for 2024?
The SEP IRA contribution limit for 2024 tops out at $69,000. That’s the maximum amount you can contribute to a SEP account on behalf of an employee or to your own SEP IRA if you’re self-employed.
Can I contribute to both a SEP IRA and a 401(k)?
It’s possible to contribute to both a SEP IRA and a 401(k) if you’re employed by multiple businesses. The plans must be administered by separate companies, or you must work for a company that has a 401(k) and then contribute to a SEP IRA for yourself as a self-employed business owner.
Are SEP IRA contributions tax-deductible for employers?
Employers can deduct SEP IRA contributions made on behalf of employees. Contributions must be within the annual contribution limit to be deductible. Excess SEP IRA contributions are not eligible for a deduction.
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