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Tax

SEP-IRA Frequently Asked Questions Provided by IRS

How much can I contribute to my SEP?

The contributions (cash only, no other property) you make to each employee’s SEP-IRA each year cannot exceed the lesser of:

a) 25% of compensation, or

b) $53,000 for 2015. Compensation up to $265,000 in 2015.

How much can I contribute if I’m self-employed?

The same limits on contributions made to employees’ SEP-IRAs also apply to contributions if you are self-employed. However, special rules apply when figuring the maximum deductible contribution. See  Publication 560  for details on determining the contribution amount.

Must I contribute the same percentage of salary for all participants?

Most SEPs, including the IRS model Form 5305-SEP, require you to make allocations proportionate with the employees’ compensation (salary/wages).  If you are self-employed, your contribution would be based on your net profit – minus one-half of the self-employment tax – minus your SEP contribution. See  IRS Publication 560  on determining the contribution amount.

If I participate in a SEP plan, can I also make tax-deductible traditional IRA contributions to my SEP-IRA?

If the SEP-IRA permits non-SEP contributions, you can make regular IRA contributions to your SEP-IRA, up to the maximum annual threshold. However, the amount of the regular IRA contribution that you can deduct on your income tax return may be reduced or eliminated due to your participation in the SEP plan.

If I participate in a SEP plan, can I contribute to a Roth IRA in addition to receiving contributions under the SEP plan?

Yes. A SEP-IRA is a traditional IRA that holds contributions made by an employer under a SEP plan.  You can both receive employer contributions to a SEP-IRA and make your own annual contributions to a traditional and/or Roth IRA.

Therefore, you can add your own contribution to this IRA and do not need to open a new IRA, subject to the IRA contributions rules.

 
Can I make catch-up contributions to my SEP?

No.  SEPs are funded by employer contributions only. Catch-up contributions apply only to employee elective deferrals. However, if you are eligible to make traditional IRA contributions to your SEP-IRA account, you may be able to make catch-up (50 year-old) IRA contributions.

Must I contribute to the SEP every year?

No. You are not required to contribute every year. In years that you contribute to the SEP, you must include all eligible employees.

Do I have to contribute for a participant who is no longer employed on the last day of the year?

Yes. You do, if they are otherwise eligible for a contribution. A SEP cannot have a last-day-of-the-year employment requirement. If the employee is otherwise eligible, they must share in any SEP contribution.

This includes eligible employees who die or quit working before the contribution is made. If you haven’t made a contribution for an eligible employee in your SEP plan, find out how you can  correct  this mistake.

Can I contribute to the SEP-IRA of a participant over age 70 ½?

You must contribute for all employee eligible to participate in the plan, even if they are over age 70 ½. The employee must also take minimum distributions, however. If you haven’t contributed for an eligible employee in your SEP plan, find out how you can  correct  this mistake.

Depositing and deducting contributions

When must I deposit the contributions into the SEP-IRAs?

You must deposit contributions for a year by the Federal income tax filing due date (including extensions) for the year. If you have obtained an extension of time for filing your return, you have until the end of that extension period to deposit the contribution, regardless of when you actually file the return.

If you did not request an extension to file your tax return and did not deposit the SEP plan contributions by the filing due date for that return, you are not allowed to deduct any SEP plan contributions on that year’s tax return.

If you improperly deducted SEP plan contributions on your return, you must file an amended tax return as soon as possible.

How much of the SEP contributions are deductible?

The most you can deduct on your business’s income tax return for SEP contributions to your employees’ plan is the lesser of your contributions or 25% of compensation.

(Compensation considered for each employee is limited and subject to annual  cost-of-living adjustments ). If you are self-employed and contribute to your own SEP-IRA, there is a special computation to figure the  maximum deduction.

Are employer contributions taxable to employees?

No, contributions to employees’ SEP-IRAs are not included in their gross income, unless they are excess contributions.

What are the consequences to employees if I make excess contributions?

Excess SEP contributions are included in employees’ gross income. Employees, who withdraw the excess contribution (plus earnings) before the due date for their federal return, including extensions, will avoid the 6% excise tax imposed on excess contributions in an IRA.

Excess contributions left in the employee’s SEP-IRA after that time will be subject to the 6% tax on the employees’ IRAs, and the employer may be subject to a 10% excise tax on the excess nondeductible contributions.

If my SEP plan fails to meet the SEP requirements, are the tax benefits for me and my employees lost?

Generally, tax benefits are lost if the SEP fails to satisfy the Internal Revenue Code requirements.

However, you can retain the tax benefits if you use one of the  IRS correction programs  to correct the failure. In general, your correction should put employees in the position they would have been had the failure not occurred.