HOLIDAY CLOSURE: Our offices will be closed on Wednesday, June 19, 2024, in observance of the Juneteenth holiday. We will reopen for regular business hours on Thursday, June 20, 2024. 

Fund Your Self-Directed IRA With A SEP Contribution

Do you have self-employment income you would like to invest in an IRA? A SEP plan is an easy option that allows you to make a large pre-tax contribution into an IRA for one year without the commitment of a yearly SEP contribution. 

With a SEP plan, you can contribute up to 25% of your compensation or $61,000 for 2022, whichever amount is less (an increase from 2021’s limit of $58,000). The deadline for making a SEP plan contribution is your business’s tax-filing deadline, plus extensions. For example, if you operate a calendar-year sole proprietorship and you want to make a SEP contribution for the 2021 tax year, you may establish and fund a SEP plan as late as October 15, 2022, with a tax-filing extension.

Once you establish a SEP plan, you are not required to contribute every year. The option to contribute and flexibility of how much to contribute makes SEP plans particularly well-suited for start-up companies or other businesses with significant fluctuations in profits.

To make a SEP contribution, simply deposit dollars in a Traditional IRA and inform your IRA custodian that it is a SEP plan contribution—this can only be done with a Traditional IRA because SEP contributions cannot be made to Roth IRAs. Once the cash is in your IRA, you can invest, transfer, and distribute it at any time, just as you can with other Traditional IRA assets. You can make a SEP contribution directly to your self-directed IRA and can transfer or roll over existing SEP IRA assets to your self-directed IRA. There are no restrictions on moving or distributing SEP assets.


Calculating Contributions

As stated above, the general limit for SEP plan contributions is 25% of compensation up to the annual dollar limit, which is $58,000 for 2021 and $61,000 for 2022. Just like other tax-qualified retirement plans, however, contributions can only be based on compensation up to the annual “compensation cap” for the year. This amount is $290,000 for 2021, and $305,000 for 2022.

If you earn W-2 wages from your company, the calculation is simple:

  • If you earned $100,000 compensation in 2021, your maximum SEP plan contribution would be $25,000 (the lesser of $58,000 or 25% of $100,000).
  • If you earned $300,000 compensation in 2021, your maximum SEP plan contribution would be $58,000 (the lesser of $58,000 or $72,500 (25% of compensation up to the annual cap of $290,000).

If you do not receive W-2 income from your business, calculating your maximum SEP contribution is more complex. Your contribution is calculated using your net earnings from self-employment, which takes into account the deduction for a portion of your self-employment tax and for your SEP plan contribution. This means that the deduction for your SEP plan contribution and your net earnings depend on each other. A helpful worksheet for calculating contributions can be found in IRS Publication 560Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).


Do You Have Employees?

If your business has employees and you choose to make a SEP plan contribution for the year, you must make contributions for all employees who meet the eligibility requirements you selected for your plan. Possible eligibility requirements include having to reach a certain age (up to 21), having to earn at least $650 in the current year, and having worked for you in at least three of the last five years. If you used IRS Form 5305—SEP to establish your SEP plan, you and each eligible employee must receive a contribution that is the same percentage of compensation. For example, if you want to make a 10% contribution for yourself, each of your eligible employees would also have to receive a contribution equal to 10% of their compensation. Employee contributions are tax-deductible expenses for the business.  


We Can Help

A SEP plan is easy to establish and maintain. It’s not too late to fund a SEP plan for 2021. Talk to your financial advisor or tax professional to make sure you understand the contribution potential based on your business income. If you have questions about establishing a SEP plan and funding your SDIRA with a SEP contribution, visit where our IRA experts are ready to assist you.



Tags: 2021 IRA Contribution, IRA Contribution limit, ira contributions, SDIRA, self-directed ira, SEP IRA, Traditional IRA