Advertisement
IRAs

How Much Can You Contribute to a SEP IRA for 2019?

The maximum SEP IRA contribution is $1,000 higher than the 2018 limit and is significantly more than can be saved for retirement in a regular IRA.

A Simplified Employee Pension IRA, or SEP IRA for short, is a good option for self-employed workers and small-business owners who want an easy and inexpensive retirement plan. A SEP IRA is also generous, allowing retirement savers to put away much more than they could with some other retirement accounts.

SEP IRA Contribution Limits for 2019

For 2019, a self-employed business owner effectively can salt away as much as 20% of his or her net income in a SEP IRA, not to exceed the maximum contribution limit of $56,000. That's up from $55,000 in 2018. In comparison, a traditional IRA limits contributions to $6,000 for 2019 for those younger than 50, or $7,000 for those 50 or older thanks to a $1,000 catch-up contribution.

SEP IRAs are available for a variety of small-business types, including sole proprietorships, partnerships, limited liability companies, S corporations and C corporations. The plans can be an especially attractive option for a small business with few employees, says Brad Ronsley, a certified financial planner in Glen Ellyn, Ill.

Advertisement - Article continues below

There's a twist, however, when it comes to SEP IRAs. Unlike some other retirement plans, a SEP IRA allows only the employer to contribute. And whatever percentage of compensation employers set aside in the plan for themselves is the same percentage of pay they must contribute for each eligible employee.

Advertisement
Advertisement - Article continues below

To be eligible to participate in an employer's SEP IRA, employees must be at least 21 years old, have worked at the business for three of the past five years and have earned at least $600 from the job in the past year.

SEP IRAs vs. Traditional IRAs

SEP IRAs follow many of the same rules as traditional IRAs. You generally must be at least 59 1/2 to take withdrawals from the account without paying a 10% penalty.

And once you turn age 70 1/2, you will have to start taking required minimum distributions (RMDs). You have until April 1 of the year after you turn 70 1/2 to take your first required minimum distribution, but after that you must take RMDs by Dec. 31 of each year (even if you took your first RMD on April 1 of that same year).

Advertisement - Article continues below

Since employers make the contributions, not employees, catch-up contributions for retirement savers 50 and over are not permitted in SEP IRAs.

A SEP IRA is easy to open and widely available at financial institutions that offer individual retirement accounts. A business owner must first complete an application with a brokerage or investment company such as Fidelity, Vanguard or Charles Schwab, says Todd Youngdahl, a certified financial planner in Falls Church, Va. This type of account allows business owners to develop an investment strategy and portfolio with many choices for investments, including mutual funds, exchange-traded funds and individual stocks, at little operational cost, he says.

"In most cases, there is no set-up fee for a SEP IRA and no annual custodial or maintenance fee," Youngdahl says.

You can build a sizable nest egg with a SEP IRA. For example, take a 30-year-old who contributes $10,000 a year to a SEP IRA and has an annual return of 6%. By age 65, he or she will have contributed $350,000, but the nest egg will have grown to nearly $1.2 million.

A SEP IRA would be a good option for someone with a side gig outside of his or her regular job, says Mark Beaver, a CFP in Dublin, Ohio. It would allow the worker to contribute fully to his or her employer's 401(k) and use the SEP IRA for self-employment income, Beaver says.

Advertisement

Most Popular

Chiropractor Trying to Get Business the Wrong Way – Illegally
careers

Chiropractor Trying to Get Business the Wrong Way – Illegally

A new chiropractor’s fledgling business plan to attract patients may sound reasonable at first look, but it’s actually against the law, and the same p…
June 30, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020

Recommended

Find a Great Place to Retire
happy retirement

Find a Great Place to Retire

Our cities provide plenty of space to spread out without skimping on health care or other amenities.
July 2, 2020
Searching for the Perfect Place to Retire
Empty Nesters

Searching for the Perfect Place to Retire

We home in on two places with less traffic and lower costs. 
July 2, 2020
Hail to Your Finances, Regardless of Who Wins Presidency
retirement planning

Hail to Your Finances, Regardless of Who Wins Presidency

Don’t try to navigate your investment choices based on election uncertainty. And don’t wait to find out who wins in November to make financial decisio…
June 30, 2020
Resources for alternative forms of transportation needed by many older adults
retirement

Resources for alternative forms of transportation needed by many older adults

For many older adults, having an alternative mode of transportation may be the difference between independence and social isolation.
June 29, 2020