SEP IRA – Contribution Limits and Deadlines

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Summary of SEP IRA, contribution limits, and deadlines

A SEP is a simplified employee pension plan and is designed to furnish business owners with an easy way to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP IRA).  Contributions are tax deductible and investments grow tax deferred.  10% early withdrawal penalties exist if participants make withdrawals prior to turning 59 1/2 – much like other tax sheltered plans (401(k) and traditional IRA.)

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Follow this link for information on Traditional and Roth IRA contribution limits.

Details of SEP IRA, contributions limits, and deadlines

The SEP IRA was designed as a low cost solution for allowing small businesses to provide employees with a pension without shouldering the high administrative costs of 401k’s and defined benefit plans. When an employer contributes to a SEP IRA the money goes into an IRA owned and managed by the employee.

Know the difference between contributions and deductions.

  • Contribution – The amount you pay into a plan for all those participating in the plan, including self-employed individuals. Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant.
  • Deduction – The plan contributions you can subtract from gross income on your federal income tax return. Limits apply to the amount deductible.

Which broker should you use to manage your SEP IRA?  Good question.  I highly recommend using a discount broker and of the firms I’ve worked with I like TradeKing the best.

SEP IRA contribution limits

For corporations:

One of the primary benefits of a SEP IRA is that it has a high contribution limit. The 2009, 2010, and 2011 contribution limits for eligible employees are the lesser of either $49,000 or 25% of total employee compensation.

  • Example 1: Your employee earned $50,000 for 2010. The maximum allowable contribution to their SEP IRA is $12,500 (25% x $50,000.)
  • Example 2: Your employee earned $200,000 for 2010.  The maximum allowable contribution to their SEP IRA is $49,000 (because 25% of $200k is $50k which exceeds the $49k limit.)

For sole proprietors:

Contribution limits for the self-employed are not quite as straight forward but, barring limits, are approximately 20% of net profits with a maximum of $49,000. Remember that any contributions to a 401(k) or IRA, along with any employer matches to your 401(k) contributions, reduce your $49,000 maximum. Basically… all combined investments in defined contribution plans cannot exceed $49,000.

  • Example 1:  You earned $50,000 for 2010.  Your maximum allowable contribution to your SEP IRA is $10,000 (20% x $50,000.)
  • Example 2:  You earned $250,000 for 2010.  Your maximum allowable contribution to your SEP IRA is $49,000 (because 20% of $250k is $50k which exceeds the $49k limit.)

Only income from the business can be contributed.  Put another way, you cannot contribute money from another job separate from your business. Also, an adjustment is necessary to account for their ability to deduct both FICA taxes paid, and contributions to their own SEP IRA, both of which count toward their maximum deductible income for the year.

SEP IRA contribution and deduction deadlines

The contribution deadline for previous year SEP IRA contributions is the same as the due date of your employer’s return, including extensions. That means it is not too late for those with small businesses to lower their taxable income by contributing to their SEP IRA.

Other SEP IRA details

As mentioned above, most of the same rules that govern a Traditional IRA also apply to a SEP IRA. Specifically the minimum, no-penalty withdrawal age of 59-1/2, and the required minimum distributions beginning at age 70 1/2. Since the money contributed to a SEP IRA is pre-tax, distributions will be taxed at whatever rates are in effect for your bracket during the year of distribution.  Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70 1/2 . If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70 1/2.  Just remember that participants age 70 1/2 or over must take required minimum distributions. As a final consideration, the IRS does not allow a loan to be taken out against the remaining account balance. This common feature of 401k plans provides a semi-liquidity option many have come to expect, the absence of which should be considered before large sums are contributed.

Which broker should you use to manage your SEP IRA? Good question. I highly recommend using a discount broker and of the firms I’ve worked with I like TradeKing the best.

Note:  I am not a tax professional. Consult IRS Publication 560 and/or your tax professional for details.

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1 Jason @ Redeeming Riches

Solid post! Congrats on the DFA Staff Writer position, Robert. Looking forward to more posts from you!

The SEP-IRA is an often overlooked option for business owners trying to stash a little more away without the added costs and reporting!

2 Peter

Great informative post Robert – excellent writing. I look forward to more great posts!

Question.. I wasn’t 100% clear on if you have to be completely self employed to have one of these accounts, or if you can simply have a side business in addition to your day job – and contribute to one of these?


3 Matt Jabs

Good question Pete. According to IRS Publication 560:

Self-employed individual. An individual in business for himself or herself, and whose business is not incorporated, is self-employed. Sole proprietors and partners are self-employed. Self-employment can include part-time work.

4 Robert Espe

The only catch is you can only contribute Self-Employment income to your SEP. Money from your day job must be saved in an employer’s 401k, or a ROTH/TIRA.

5 Jason @ One Money Design

Good informative post, Robert. I look forward to more of your writing each week.

6 Neal

Robert. Nicely done. You may find yourself in the running for the Pilgrim Pick of the Pack one of these days…soon.

7 Matt Jabs

Robert, this is a very prestigious award… I wish you the best of luck! 🙂

8 Jason@Frugal Dad

Very informative post, Robert! I’m torn between continuing to contribute to my 401k at my full-time gig or going with a SEP or Solo 410k plan. Unless things really take off, it looks like I can save more by maxing out my 401k at work, but that could change. Thanks for providing some specific numbers so I can run through these calculations.

9 Early Retirement Extreme

Since 19% is a pretty small amount compared to, say, a SIMPLE IRA or a 401k, is it allowed to contribute to both a SEP IRA and a regular IRA at the same time?

10 Robert Espe

You can contribute to a TIRA or 401k, but the IRS will only let you defer so much income a year. So you can spread the money between different accounts, but it won’t raise your contribution limit (remember, the lower limit is because a self employed person is also deducting FICA). If you want to save more, you can put an additional $5k/year into a ROTH IRA and enjoy the tax advantage on the other end.

11 Ben

Wow, I had forgotten how high the contribution limit was for the SEP. Now if only I had that much to put in there 🙂

Thanks for the writeup Robert!

12 Paul @ FiscalGeek

Adding this to my resource pool for breaking free from the man. Awesome information, great out of the gate Robert!

13 joe f


i am self employed and as a result of a large fee i will earn in one shot 90k
my wife is working for a boss with no retirmement at all . her income is 48k
until now we only put in ira. but a sep ira + ira might be the best way to go
estimated total income for 2010 is 135k
we pay our own health plan.
max for sep ira
max for ira
max for health savings plan

How much approximately can i put away for h and w in total for a sept ira or a combined sept ira & an ira
joe f

14 Matt Jabs

Hey Joe, sounds like you could do $10,000 in a traditional IRA ($5k for each of you) and to figure your limits for the SEP contribution simply follow the calculation tables/worksheets in IRA publication 560.

Simply open the .pdf file, and scroll down to section 5 (page 22) and follow the worksheets. According to the IRS your contribution will probably be around 18.6% of your net profit.

15 Mark T.

I am a partner, and the partnership has other employees. Can the partnership make SEP contributions for only the partners, and not the other employees? The partnership is in it’s 2nd year of operation.
Mark T.

16 Lynn

What happens if I put over the maximum allowed in my SEP ira? I refigured my taxes, my income went down so my allowable amount went down. I only listed the lower amount as my tax deduction. What, if anything do I need to do??

17 Neal


I’m not a CPA but my Pilgrim Cube tells me you should withdraw the excess contributions prior to tax filing time. As long as you do that, you should be fine. Any CPA’s want to weigh in?

18 Lynn

Thanks Neal. This is actually from a few years ago so guess I better get on it!

19 sep iras student

Thanks…I know a lot more about Sep IRAs now.

20 Vicki

The most appealing feature of the Sep retirement account is the higher contribution limits, which are helpful to us late-bloomers.

21 Kelly

I have a SEP for myself and my sole employee. I always contribute the same percentage of salary for her as for myself. May I contribute a larger percentage for her? My CPA says no, but I can’t see why I can’t discriminate against myself. I want to give her a certain percentage, but I can’t afford to give myself the same percentage. Thanks!

22 Matt Jabs

Hi Kelly – I’m not positive, but I believe you are supposed to put the same amount toward every employee. I would ask another tax accountant or perhaps a tax attorney. God bless.

23 Amy

Maybe I’m doing the math wrong, but in your sole proprietorship example 2, shouldn’t the max be $40,000?

Also, how does the SEP IRA affect contributions to existing Roth or Traditional IRAs? Could I max out the SEP as a sole proprietor and still put $5000 in a Traditional or Roth?

Thanks for the info!

24 Matt Jabs

Thanks for stopping by and commenting Amy… good questions.

First, in the example the employee only made $50k and 20% of that amount is $10k, which is the allowable contribution.

Secondly, from IRS Publication 560:

Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or Traditional IRA. However, if you contribute to a defined contribution plan (401(k), IRA, etc.), annual additions to an account are limited to the lesser of $49,000 or 100% of the participant’s compensation. When you figure this limit, you must add your contributions to all defined contribution plans. Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans.”

Long story short… you can contribute your $5k to your Roth as long as your SEP contributions did not exceed $44k, so both contributions together = $49k. Hope that helps.

25 Cloe

I am an employee at a small business (owner and three employees). The owner has an SEP IRA and says that employees are eligible after five years. I read the requirements to say that employees are eligible after three consecutive years of service (any three years in the preceding five). Am I reading that right? If I have been here for 4 years, I should be eligible now?

Thanks –

26 Matt Jabs

Since this depends on the details of their policy, your best bet is to ask your employer of the specifics.

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