SEP IRA Retirement Calculator

sep ira calculator

What is a SEP IRA?

SEP IRA is a Simplified Employee Pension plan for retirement years. This retirement pension plan suits all kinds of employers. Under this pension plan, a self-employed person can not only contribute toward their employees’ retirement but also for his own retirement plan. Contributions are made directly to an IRA set up for each employee (a SEP-IRA) and the employer.

What are the rules for SEP IRAs?

Some of the important rules for SEP IRA are :

  1. Internal Revenue Code Sections 402(h) and 415 provides that employer can not make contributions to an employee’s SEP-IRA more than the lesser of
    • $57,000 for 2020;( $56,000 for 2019 and $55,000 for 2018) or
    • 25% of the employee’s compensation. The amount of compensation taken into account is also limited ($285,000 in 2020;( $280,000 in 2019 and $275,000 in 2018).
  2. However, if the SEP plan document specifies lower contribution limits, then the lower limits will be applied.
  3. Employer contribution % must be equal to all eligible employees.
  4. Employee elective deferrals and catch-up contributions are not permitted in SEP plans. Only employer contributions are allowed.
  5. The withdrawals from SEP IRAs in retirement are taxed as ordinary income. 
  6. SEP-IRA allows sole proprietors getting wages may also make a SEP contribution. The total contribution is limited to 25% of wages (or profits) minus the SEP contribution. One should note that if the self-employed person also draws a salary, his contribution to SEP should be same as that of employees.

How to compute SEP-IRA contribution limit for yourself as an employer?

If the self employed person does not draw salary and desires to contribute to SEP-IRA, the contribution limits are different from employees . Then,a special rule is required to calculate retirement plan contributions .. For example, a self-employed person may decide to contribute 10% of each employee’s compensation to a SEP plan. But, this formula does not work for his (employer) own contributions. The sep-ira calculator given below is for that purpose only

The calculator for the employer when does not draw salary

The aforesaid sep-ira calculator for employer is based on this example given by IRS

What is the SEP-IRA contribution deadline?

The SEP-IRA rules fix a deadline for making contributions for a given tax year. The SEP-IRA deadline for contribution is the same for filing a tax return due date i.e April 15. Another deadline for SEP-IRA is about taking the distribution. As per rule, like with traditional, one must begin taking distributions when one enters the age of 70-1/2. You can start earlier, without penalties, beginning at age 59-1/2.

Is there an advantage of SEP-IRA over Traditional or Roth?

Yes, there are some advantages of setting up SEP IRA over traditional IRA or Roth IRA.

  1. The big advantage of the SEP-IRA over Traditional and Roth IRA accounts is that in case of SEP -IRA, a very wide choice of investments like mutual funds and exchange-traded funds (ETFs) are available.
  2. The business owner can claim a tax deduction for sep-ira contributions to an individual account.
  3. You also have the opportunity to contribute nearly 10 times more to a SEP IRA than a Traditional IRA
  4. There are other benefits to the employee as well. They can tax defer interest, dividends, employer contributions and other investment till withdrawal at the time of retirement.

What is the eligibility for employees opening a SEP IRA account?

The employees are eligible for a SEP IRA if they:

  • Are older than 21
  • Have worked for the business in at least three of the five years preceding the year in which the IRA contribution is made
  • Have received $600 or more in compensation from the business in 2020

However, the IRS states that all eligible employees must participate in the SEP, including part-time and seasonal workers and employees who die, quit, or get laid off or fired during the year.

What are the limitations of SEP-IRA?

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