How to Contribute to a SEP-IRA
You make the contributions to:
- A traditional individual retirement arrangement (IRA), or
- Traditional individual retirement annuity set up for each eligible employee. Employees can set up their own account.
Where to send contributions:
You send the contributions to the financial institution where the SEP-IRA is maintained.
If you're self-employed you are considered an owner/employee and make contributions to your own SEP-IRA.
More than one business:
If you have more than one business, but only one has a retirement plan, as a self-employed person, your own contribution and contributions for employees (if any) is based on the earned income from that business.
SEP-IRA Contribution Limits
For tax year 2012, contributions you make to an employee's SEP-IRA cannot exceed the lesser of:
- 25% of the employee's compensation or
- $50,000 ($49,000 for 2011)
SEP contributions to employees' SEP-IRA accounts are not included in their gross income unless they exceed the annual limit (see above). Contributions that exceed the annual limit are called excess contributions.
The annual limits on contributions to your own SEP-IRA are the same that apply to your common-law employee's SEP-IRAs.
However, self-employed persons must perform a special computation to figure their own maximum deductible contribution.
Annual Compensation Limit:
The annual compensation limit you may consider for determining the amount of an employee's contribution for tax year 2012 is $250,000 ($245,000 2011).
For retirement plan purposes, a self-employed person is considered both employer and employee of his business. This comes into play for SIMPLE IRA plans, which are salary-reduction retirement plans.
With a SIMPLE IRA, a self-employed person may make a contribution to his or her own account as an "employee", then, putting on the "employer's hat", a self-employed person may make a second contribution to his or her own account, called a "matching contribution". Bottom line, a self-employed person gets to make two separate contributions for his or her own benefit; one as an "employee" and another as "employer".
Keep in mind, for income tax purposes, a self-employed person is not considered an employee of his business; the owner does not get a paycheck like employees do. When a self-employed person takes funds out of the business, its called a draw and not wages or salary. wages and salaries are recorded as expenses while draws are debited to the draw account a serve to reduce capital.
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- Return to the Retirement Plans Table of Contents to find related links