In order to ensure large paybacks from this IRA’s contribution, one needs to know the limits of the contribution. It can be a tough job to strategize the funding of your SEP IRA account if you do not enlighten yourself with SEP IRA Contribution Limits.
The limit talked about earlier is in terms of the share of employee’s wage that can be transferred into an employer’s account. Suppose the limit is 30 % and the employee’s income is $100,000 then the employer’s contribution cannot be less than $30,000 into his SEP IRA Account.
There is another provision in the SEP IRA rules for the self-employed in which they have the limit to contribute 20 % in their SEP IRA account. These particular restrictions are applied only to those who earn up to $245,000 though. And adding to the above stated rules, an upper bar is set in terms of the amount that can be contributed.
Restrictions for the Self Employed Individuals
Generally, the SEP IRA Contribution Limits are restricted to approximately 18.5 % of the total gain of the employer or the self- employed. The limit is actually claimed to be at 20% but little bit of tweaking makes it a bit lower than 20%. The allowed limits of as low as 20% for the self-employed can be explained as well. The person under this category has to deal with an additional FICA (Federal Insurance Contributions Act tax), and, there is the tax deduction adjustment to be made as well. e SEP IRA Contribution Limits.
So the overall profits of the employer are reduced by the tax amount which is to be paid due to the self-employment status. This determines the overall limits of the funding.
Working Of the SEP IRA Contribution Limits
For a business owner, there is an additional contribution into the SEP IRA account through the profits earned in the business. The standard contribution of 25 % (maximum) of the employer’s and employee’s earnings stand as it is. However, the contribution of the employer into the SEP IRA account of the employees is directly reflected by the 20 percent share of the net earnings of the employee. Here the net warning include the SEP IRA contribution made by the employer into their account.
The concept that is to be understood is that maximum permitted SEP IRA contribution is the 20 % of the net amount left after subtracting the half of employment tax from the net profits of the business owner.
So, let us assume that you gained $100,000 this year as the business owner. The 50% of the tax of the self-employment status is added as the tax credit into this profit. Thus, the overall earning of the business owner is actually the SEP IRA Contribution Limits added to the net gains of the business in that year. You as an employer have the rights to fund your SEP IRA account only before the day you pay the returns on your taxes.
So if you’re an employer looking to get into SEP IRA contribution, go through the paperwork to learn of limits and restrictions governing your SEP IRA account.
curtmatsen1975 