Financial Planning

SEP IRA Contribution Limits for 2021

The maximum SEP IRA contribution is higher this year than it was for 2020.

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.

SEP IRA Contribution Limits for 2021

For 2021, a self-employed business owner effectively can salt away as much as 25% of his or her net income in a SEP IRA, not to exceed the maximum contribution limit of $58,000. (That's up from the maximum in 2020.) In comparison, a traditional IRA limits contributions to $6,000 for 2021 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 2021.

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. 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.

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.

Most Popular

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?
retirement

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?

In our experience, many have saved enough money to retire comfortably. Yet too many worry about their money running out and want more. Maybe it’s tim…
May 6, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
20 Dividend Stocks to Fund 20 Years of Retirement
dividend stocks

20 Dividend Stocks to Fund 20 Years of Retirement

Each of these high-quality dividend stocks yields roughly 4%, and you can expect them to grow their payouts even more. That's a powerful 1-2 combo for…
May 7, 2021

Recommended

7 Money-Smart Ways to Spend Your Tax Refund
Tax Breaks

7 Money-Smart Ways to Spend Your Tax Refund

Since this year's tax deadline was pushed back to May 17, many people are just now filing their tax return. That means there are a lot of tax refunds …
May 8, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
May 6, 2021
9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
May 3, 2021