SEP-IRA contribution percentage.

[Questionguy101]

I have always thought the maximum contribution percentage of a SEP-IRA is pre-determined by how the plan was set up. But today the financial adviser of a client said the contribution percentage can actually be arbitrarily decided by the taxpayer (sole proprietor) anywhere from 0% to 20%. Is it correct?

[JohnH]

The financial advisor is corrrect. For a SEP IRA, each year stands on its own. The contribution rate can be changed at will - the only requirement is that all eligible individuals be treated the same in any given year. When there is only one eligible individual, it becomes very simple.

[New York Enrolled Agent]

I have always thought the maximum contribution percentage of a SEP-IRA is pre-determined by how the plan was set up. But today the financial adviser of a client said the contribution percentage can actually be arbitrarily decided by the taxpayer (sole proprietor) anywhere from 0% to 20%. Is it correct?

To be technically correct, the maximum plan percentage is actually 25%. (See §404(h)). In the case of a self-employed person, that rate must be reduced in a backward way so that the effective rate does reach a maximum of 20%. (See §404(a)(8)).

Any plan documents should show the 25% figure. If the stated percentage was 20%, the effective rate would only be 16.67%.