SEP IRA Contribution Limits And Other Related DetailsSEP IRA is among the most popular retirement plans instituted by companies for their employees. This is because of the fact the employee is free to decide if he would make the contributions to ITR or not. You have to consider that the Internal Revenue Service does define SEP IRA contribution limits on the higher end of contribution as well as a number of other provisions which regulate the manner in which SEP IRA contribution is handled. It is required that employer must not make contributions in excess of 25% of the money that was given to the employee as his wage. Further more for 2008, this restriction of 25% is also defined. The 25% of the income which can be contributed must not exceed $46000. While the employee income is not affected by this, the SEP IRA maximum contribution is not allowed to exceed $46000. Please note that this means 25% limit is applicable if the annual income does not exceed $230, 000. In order to understand these limits more easily, you should consider an example. The example assumes you have a company named anything and has four people working for it. All these employees are otherwise eligible to hold a SEP IRA. Assume that the first employee makes $40000, the second makes $80,000. The third makes $ 160,000 and the fourth makes $250,000. Take the case of each employee one by one. You should start with the least paid employee, the first one. He makes $40000 a year. We take the 25% limit subject to maximum of $46000. The 25% of the income of your first employee is $10000. This means he is on the green side of $46000 limit. You can contribute $10000 to his SEP IRA. Coming to the second employee, the income is quoted as $80000. Again we take the rule of 25% with a ceiling of amount not exceeding $46000. The quarter of the income here is 20000 dollars. Even your second employee is with in SEP limits green side You can contribute up to $20000 to his SEP IRA account. Take up the case of third employee now. His income is $ 160,000. Taking the 25 % of this figure we stand at $40000. This employee is also on the green side of SEP IRA limits. You can contribute up to $40000 to his SEP IRA. Now consider the fourth employee who is highest paid at $250000. In this case the quarter of income is 57,500 dollars. This is where the $46,000 rider comes in the picture. You are not allowed to SEP IRA contributions in excess of the $46000 figure here. You must also know that SEP IRA contribution limits are also applicable on the date by which contribution has to made which is the deadline by which you have to file your taxes. |