SEP-IRA Compensation

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  • baxbook
    Junior Member
    • Jun 2007
    • 2

    #1

    SEP-IRA Compensation

    I am confused. When looking at The TaxBook Pension info for limitations for SEP-IRA's, page 13-2, it indicates that the Contribution is limited to 25% of wages up to $44,000.

    When reviewing the information further, it seems that the 25% is limited to $220,000 in compensation. Is this correct or can it be calculated on 100% of wages up to $44,000?
  • Bees Knees
    Senior Member
    • May 2005
    • 5456

    #2
    25% of wages up to $44,000 is correct for 2006.

    The compensation limit for defined benefit plans is $220,000. Since 25% of $220,000 is $55,000, the $220,000 wage limit is meaningless for SEPs, since the most you can ever contribute to a SEP in 2006 is $44,000. (25% of $176,000)

    Comment

    • Bees Knees
      Senior Member
      • May 2005
      • 5456

      #3
      Originally posted by Bees Knees
      Since 25% of $220,000 is $55,000, the $220,000 wage limit is meaningless for SEPs, since the most you can ever contribute to a SEP in 2006 is $44,000. (25% of $176,000)

      Actually, I take that back. The $220,000 wage limit is not meaningless. Say you have a SEP where you agree to contribute 10% of your employee's wage to their SEP-IRA. The max you can contribute is the lesser of 10% of $220,000 ($22,000), or $44,000.

      Comment

      • Dervis
        Member
        • Feb 2007
        • 33

        #4
        Calculating SEP contributions

        Originally posted by Bees Knees
        25% of wages up to $44,000 is correct for 2006.

        The compensation limit for defined benefit plans is $220,000. Since 25% of $220,000 is $55,000, the $220,000 wage limit is meaningless for SEPs, since the most you can ever contribute to a SEP in 2006 is $44,000. (25% of $176,000)
        The maximal % contribution to a SEP is 25%, but is calculated after taking out the contribution. This works out to an effective maximum of 20% before taking out the contribution. So the limit on $220,000 of income is $44,000 (20% of $220,000 or 25% of $220,000-$44,000).

        Comment

        • Bees Knees
          Senior Member
          • May 2005
          • 5456

          #5
          Originally posted by Dervis
          The maximal % contribution to a SEP is 25%, but is calculated after taking out the contribution. This works out to an effective maximum of 20% before taking out the contribution. So the limit on $220,000 of income is $44,000 (20% of $220,000 or 25% of $220,000-$44,000).

          True for self employed people. Not for employees. For an employee, the 25% of wage limit is figured before taking into consideration the SEP contribution.

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