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What are some rules governing SEP IRA contributions?

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Quick Answer

Among the main rules governing Simplified Employee Pension Plan IRA contributions is that the contribution should not exceed 25 percent of compensation or $52,000 for tax year 2014, whichever is less. The Internal Revenue Service makes cost-of-living adjustments to determine the yearly maximum SEP IRA contributions. These limits are also in place for all defined contribution plans employers make for their employees, according to the rules stated on the IRS website.

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Full Answer

SEP is a type of a retirement account that employers can set up for their employees and themselves. The IRS Model Form 5305-SEP requires employers to make equal percentage contributions proportional to the wages of all employees. The contributions to SEP IRA plans that employers make on behalf of their employees and themselves are tax deductible.

While business owners and self-employed individuals have the same contribution limits as their employees, the tax deduction on the contributions that they make for themselves are subject to a special set of rules, according to the IRS website.

SEP IRA contributions are discretionary, and the rules do not require employers to make contributions each year. However, SEP IRA contributions should be made specifically to the SEP IRA accounts of the employees in the years that employers decide to make such contributions. Employers can deposit the contributions up do the due date for the filing of income tax for the tax year.

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