Limits on Contributions

April 13, 2006

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The law says that the maximum annual contribution you can make to a SEP is the lower of 25 percent of an employee's pay up to $225,000, or $45,000 for 2007 ($220,000 or $44,000 for 2006; these amounts may be adjusted for inflation).

Self-employed? If you're self-employed, the limits are slightly lower. When figuring the deduction for employer contributions made to your own SEP-IRA, compensation is your net earnings from self-employment, which takes into account: (1) the deduction allowed to you for one-half of the self-employment tax and (2) the deduction for contributions on behalf of yourself to the plan. The end result is that you will have to reduce the contribution rate called for in your plan by using a table and worksheets provided by the IRS in Publication 590 (and reproduced on our site for your convenience).

These Contributions and Deductions Table and Worksheets for the Self-Employed, which may be used to determine the deductibility of your contributions to your retirement plan, have been included in the Business Tools area.