The SEP IRA Account and Its Annual Contribution Limits

Many individuals who want to be financially prepared for their retirement would like to take a closer look at some of the most common options laid out for the self-employed, one of which is the SEP IRA or Simplified Employee Pension Individual Retirement Account. What most people are concerned about is how the contribution limit works for an employee and employer respectively.

As an employee, you can set up a 401(k) plan that promises only a small contribution limit. Normally, one can invest only up to $16,500 regardless of a person's annual salary. On the other hand, if an employee has a parallel business running (side business) or if a person is self employed, investing in a SEP IRA retirement fund would be much profitable as this allows higher contribution limits, which is up to 20% of the annual income.

For example, an employee who is earning around $50,000 a year can only deposit up to $16,500 annually the same amount that an employee who earns $100,000 a year can contribute. With SEP IRA, a self-employed individual can save up to $20,000, which is 20% of $50,000. The contribution limits vary according to the type of contribution that an individual wants to make.

According to the rules for a SEP IRA, an employer who has employees must contribute the same limit as theirs. This means that if the employer deposits 25% of his yearly wage, he must also contribute 25% of his employees' yearly wage. The only difference is that the employer still needs to pay the Federal Insurance Contributions Act tax (FICA), which results in a reduced rate of 20%. 

Although the SEP IRA is popular among self-employed for its simplified set up procedures and administrative duties, one who is interested in having one should still learn the entire concept by talking to a CPA. Valuable information and details can also be found on many websites like www.sepirahq.com. Visit the page to better understand how SEP IRA works and what benefits you can get.