SEP IRA Contribution Limits for 2013

Find Out How Much You Can Put Into SEP IRAs in Tax Year 2013

SEP IRAs, otherwise known as simplified employee pension individual retirement accounts, are retirement accounts for small- or solo-business owners. They offer higher contribution limits than most retirement plans–and those maximums are even higher in 2013.

If you are doing your taxes in 2013, take a look at SEP IRA limits for tax year 2012.

SEP IRA Contribution Limits 2013

You can contribute up to 25% of your total salary or 20% of your adjusted annual income to a SEP IRA, up to a limit of $51,000 in tax year 2013.

This is almost twice the limit for 401(k) investors. In 2013, you can put up to $17,500 into a 401(k) or 403(b). Put in an extra $5,500 if you are age 50 or older and qualify for a catch-up contribution. There are no catch-up contributions with a SEP IRA. Still the SEP offers a lot more retirement savings potential.

But even if you don't need to put away that much, a SEP IRA could be a great plan for you. If you earn part-time income on top of your full-time job, you can contribute to both a SEP and a 401(k) at the same time. You take a SEP IRA deduction as a top of the line deduction, meaning even if you don't itemize you can deduct your SEP. You don't have to put money into your SEP every year. So it's there when you need it, but there are no contribution requirements when you don't.

How Does a SEP IRA Work?

In many ways, a SEP IRA is like any other IRA or 401(k) plan. Money put into a SEP IRA can be invested tax-deferred until it is withdrawn at retirement, beginning after age 59 1/2 and no later than age 70 1/2.

If the money is withdrawn before age 59 1/2, it is subject to a 10% penalty fee plus any income taxes.

When Can You Open a SEP IRA?

You can easily open a SEP IRA before you file your taxes, and take a deduction for that tax year. This means you can make a 2013 contribution to a SEP IRA until April 15, 2014, or even as late as October 15, 2014, if an extension is filed.

You can put money into your SEP each month, quarterly or once a year. The frequency is up to you. To figure out your net adjusted self-employment income, take your gross income, subtract business expenses (here's the trick: the SEP IRA contributions are part of these expenses) and subtract half of the self-employment tax.

SEP IRA Contributions for Employees

If you have employees, a SEP IRA gets a little bit more complex. Employers are required to contribute an equal salary percentage for every employee. So if you choose a SEP for it's high contribution limits and contribute 20% of your income, your employees must do the same. (Employees here include those older than 21, who made more than $550 in 2013, and have worked for you for at least three consecutive years in the past five—though there may be some exclusions for union members.)

So should you contribute to a SEP IRA? It depends on your business. It's one of the easier self-employed retirement plan options if you have a solo business, or do contract or consulting work. As your business gets more complicated, a SEP may become more complicated as well.

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