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SEP-IRA Contribution Limits

A Guide to the Annual SEP-IRA Contribution Limits

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A SEP-IRA is usually used by highly successful self-employed people because it offers the opportunity to contribute far more to a retirement plan each year than almost any other comparable program. The reason it is used by individual entrepreneurs is because if you owned a business and used a SEP-IRA for yourself, you would have offer the same terms to all of your employees. (That means if you put 25% of your earnings in your SEP-IRA then you would have to also contribute 25% of your employee's salary to their SEP-IRA account.) Thus, you're more likely to see this type of retirement account used by a high-paid contract consultant working alone or a close-knit firm where there are a handful of partners.

The annual SEP-IRA contribution limits are set at 25% of an employee's compensation, which is capped at $245,000 for consideration in 2009 and 2010. This works out to annual contribution limits of $49,000. These SEP-IRA contribution limits are in addition to money put into a Traditional IRA or Roth IRA. In 2009 and 2010, for instance, a business owner making $100,000 could contribute $25,000 to his or her SEP-IRA ($100,000 x 25% maximum contribution limits = $25,000) plus $5,000 to a Roth IRA for a grand total of $30,000.

SEP-IRA contributions are tax deductible. The money in the account will grow tax-deferred until retirement, at which point the money will be taxed like regular, ordinary income as it is withdrawn. If the money is taken out before the account owner is 59 1/2 years old, there may a 10% additional penalty tax applied. For more information on avoiding this early withdrawal fee, read 8 Ways to Avoid the 10% Early Withdrawal Fee on Your IRA.

For more information, read our Guide to Retirement Account Contribution Limits.

SEP-IRA Contribution Limits for 2009 and 2010

YearMaximum Annual ContributionMaximum Considered Compensation
2009$49,000$245,000
2010$49,000$245,000

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