What is the maximum contribution to a SEP?
October 25, 2002
Date: Sun, 30 Sep 2002
"What is the max amount that you can contribute to a SEP in 2001 and 2002?" is about maximum contributions, but from what I read on publication 560, employers can contribute up to 25% while employees can defer up to 15% or 11,000 a year.
Date: Wed, 16 Oct 2002
Page 7 of Publication 560 says the same thing as the FAQ. The percentage of compensation for 2001 is 15%, and for 2002 is 25%.
I didn't discuss employee contributions to SEPs in the FAQ because employees generally can't make contributions to a SEP. There is another arrangement called a SARSEP for which employees can make a salary reduction contribution, like a 401(k) plan. A new SARSEP can not be adopted after 1996. The limitations for SARSEPs are explained at page 8 of Publication 560. For 2001, the maximum contribution was the lesser of (1) 15% of compensation up to $170,000 or (2) $10,500. For 2002, the maximum contribution is the lesser of (1) 15% of compensation up to $200,000 or (2) $11,000. For 2002, participants who are age 50 or over can make a catch-up contribution of $1,000.
There is an overall limit on SEP contributions. The total of nonelective and elective contributions to a SEP-IRA cannot exceed the lesser of 15% of the employee’s compensation or $35,000 for 2001, 25% of the employee’s compensation or $40,000 for 2002.
Remember that state income tax laws can further limit contributions to retirement plans. California has enacted legislation conforming to the federal rules, but the conformity legislation is being challenged as unconstitutional.
For new plans after 1996, SARSEPs were replaced by SIMPLE retirement plans. Unlike SARSEPS, an employer can't have both a SIMPLE and a SEP.
For answers to new questions, subscribe to our newsletter, Michael Gray, CPA's Tax & Business Insight by filling out the form below.
Home Newsletter Archive Introducing Michael Gray, CPA Articles Tax FAQ Need Help? Other Links