SEP IRA Contribution Limits

Course: Retirement Planning
Lesson 5: Leveraging Nonqualified Plans for Small Business and Not-For-Profit Employees and Owners

Student Question:

Hello! I am wondering why on this page it says the contribution to a SEP IRA is the lesser of 25% covered compensation or $58,000 (2021), but then it says the combined contribution for SEP IRA and qualified plans cannot exceed the lesser of 100% covered compensation or $58,000 (2021). Could you explain the discrepancy between the two statements?

Thank you


Instructor Response:

Hi Elizabeth,

Great question. SEP IRA contributions “count” against the qualified plan contribution limit.  For example, assume Jane Doe (age 45) earned $100,000 and her employer sponsors both a SEP IRA and qualified Profit Sharing plan. 

  • Assuming no employer contribution the SEP IRA, the employer could contribute the lesser of 100% of Jane’s compensation or $58,000 to Jane’s Profit Sharing plan account.
  • Now assume that the employer contributes $25,000 to Jane’s SEP IRA. The $25,000 “counts” against the qualified plan contribution limit.
  • After the $25,000 SEP IRA contribution, the maximum employer’s contribution to Jane’s Profit Sharing plan account is now $33,000 (58,000 less 25,000).

Let me know how fully that addresses your question.

Onward and Upward,