SEP-IRA Compensation

[baxbook]

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]

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)

[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.

[Dervis]

Calculating SEP contributions

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).

[Bees Knees]

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.