SEP IRA

SEP IRA Contribution Limits for 2022

The maximum you can save in a SEP IRA is increasing by $3,000 for 2022.

Self-employed workers and small-business owners who want an easy and inexpensive retirement plan should consider a Simplified Employee Pension IRA, or SEP IRA for short. Savers are also allowed to stash away more for retirement with a SEP IRA compared to an employer-sponsored 401(k) plan.

2022 SEP IRA Contribution Limits

For 2022, a self-employed business owner effectively can salt away as much as $61,000, but no more than 25% of their compensation. (That's up from the maximum of $58,000 in 2021.) In comparison, a traditional IRA limits contributions to $6,000 for 2022 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.

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.

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 $650 from the job in 2022.

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 72, you will have to start taking required minimum distributions (RMDs). You have until April 1 of the year after you turn 72 to take your first required minimum distribution, but after that you must take RMDs by December 31 of each year (even if you took your first RMD on April 1 of that same year).

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. This type of account is a good option for a worker with a side gig out of his or her regular job. 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.

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