SEP IRA Contributions: FAQs & Eligibility - [Year]

Understanding the SEP IRA contribution process can help you avoid making any mistakes when it comes to running your account. Here are a few frequent asked questions regarding the SEP IRA contribution process.

Who is Eligible to Use an SEP IRA?

Not everyone is eligible to use an SEP IRA. Before setting up this type of account, you want to make sure that you are eligible. In order to be able to contribute, you must be a sole proprietor, involved in a partnership, or be a small business. If you are receiving any form of self-employment income, you will be able to benefit from an SEP IRA.

Can Employees Contribute to a SEP IRA?

Employees are not eligible to contribute to an SEP IRA. The employer is the only one that can contribute money to this type of account. Therefore, this type of account differs from many other retirement accounts that allows employees to contribute. Employers also have the ability to decide whether they want to contribute to retirement accounts in a given year. This makes utilizing this type of retirement account very unpredictable, because you do not know how much money will go into it each year. 

What Are SEP IRA Contribution Maximums?

There are maximum limits that must be adhered to when contributing money to an SEP IRA. An employer cannot contribute more than 25% of an employee's annual salary to their account. This number is based off of W-2 income for the year. In addition to that, an employer cannot contribute more than $49,000 per year regardless of how much the employee makes.

How Do Discretionary Contributions Work?

With a SEP IRA, the employer can utilize discretionary contributions to their employees accounts. This means that they can decide on a year-to-year basis whether or not they want to contribute anything to the accounts. As an employee, this might sound discouraging because it may seem like there is no reason for your employer to contribute to your account. However, there are two reasons that an employer would want to put money in your account. First of all, they will get a tax deduction for every dollar that they put into an employees retirement account. This lowers their taxable income for the year and in turn, their tax liability.

In addition, the percentage that goes into each employees account in the company has to be uniform. This means that whatever percentage of money they put into their own retirement account, they have to put into your retirement account as well. Therefore, if the owner of the company wants to contribute to their retirement, they will also have to contribute to yours. This means that you can feel fairly safe that the employer will do their best to fund your retirement account for you.

When is the Deadline for Contributions?

With this type of account, the employer has to make their yearly contributions by the day that they file their taxes. In most cases, this means that they have to contribute before April 15.