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The SEP IRA stands out as a top choice for small businesses and individual business owners seeking to help their employees save for retirement, with the contribution limit set to increase in 2024 compared to 2023. This retirement account enables employers to set aside substantial sums of money on behalf of their employees, surpassing the limits of a traditional IRA.
In 2024, those utilizing a SEP IRA can contribute up to $69,000 or 25 percent of their business earnings or compensation, whichever amount is lower. Contributions for the 2024 tax year can be made up until the tax day deadline on April 15, 2025. It’s important to note that a SEP IRA, being employer-funded, does not offer catch-up contributions.
These enhancements are part of a broader trend of increased contribution limits across various retirement account types, including traditional and Roth IRAs, as well as 401(k) and 403(b) plans.
SEP IRA Contribution Limits
The contribution limit for a SEP IRA is the lesser of:
- 25 percent of the employee’s compensation
- $69,000 in 2024
Unlike employee contributions, a SEP IRA is an employer contribution, meaning it is made by the company rather than the individual. Notably, a SEP IRA does not offer catch-up provisions for older workers, which are available in retirement plans like IRAs or 401(k)s.
On the other hand, the solo 401(k) option, favored by solo entrepreneurs, does allow for catch-up contributions, making it a potentially more appealing choice for certain small businesses.
The SEP IRA imposes a limit on the annual compensation used to calculate retirement plan contributions, set at $345,000 for 2024, up from $330,000 in 2023. This limit is adjusted annually by the IRS.
Can You Contribute to Both an IRA and a SEP IRA?
Participating in a SEP IRA with employer contributions does not prevent you from making contributions to a traditional or Roth IRA. This means that your employer can make a full SEP IRA contribution for you, while you can also make the maximum contribution to your own traditional or Roth IRA in the same tax year.
However, if you, as an employee (not an employer), contribute funds to your SEP IRA (if permitted by your plan), it will reduce your contribution limit to other IRAs on a dollar-for-dollar basis.
To maximize your retirement savings potential, consider having your employer contribute the maximum to your SEP IRA while you contribute to your personal IRA separately.
Roth Option Now Available for SEP IRAs
The Roth IRA, known for its tax advantages, is now an option within the SEP IRA for small businesses.
Prior to 2023, SEP IRAs were exclusively pre-tax. While employers made contributions for employees, withdrawals during retirement were taxed at ordinary income rates. Distribution rules generally mirrored those of a traditional IRA.
Thanks to the SECURE Act 2.0, employers can now offer Roth SEP IRA plans, where contributions are made after-tax, grow tax-free, and are tax-free upon withdrawal in retirement.
Final Thoughts
The SEP IRA presents a valuable opportunity for small businesses to support their employees’ retirement plans. With annual increases in maximum contributions, it’s crucial to stay informed about the limits if you aim to maximize your retirement savings.