The 2017 SEP IRA contribution limit is $54,000 and the 2018 SEP IRA contribution limit is $55,000.
S or C corporation or an LLC taxed as a corporation.
For incorporated businesses, compensation is based on W-2 income. Annual contributions can be made into a SEP IRA up to 25% of W-2 income.
Sole proprietorship, partnership or an LLC taxed as a sole proprietorship
For those taxed as sole proprietors compensation is based on adjusted earned income. Adjusted earned income is determined by completing an IRS worksheet. SEP IRA contributions of 20% of adjusted earned income can be made annually. In 2017 annual compensation of more than $270,000 cannot be taken into consideration for determining contributions. In 2018 the compensation limit increases to $275,000.
Contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred. Withdrawals after age 59 ½ are taxed as ordinary income. Withdrawals prior to age 59 ½ may incur a 10% IRS penalty as well as income taxes.
A SEP IRA has broad appeal due to its high annual contribution limits, completely discretionary and flexible annual contributions and minimal administration. SEP IRA plans can be established by a one person business or by a business owner with employees.
Most frequently a SEP IRA is established by a business owner with no employees, however, in special situations it may be an ideal retirement plan for a business owner with employees.