Course: Retirement Planning
Lesson 5: Leveraging Nonqualified Plans for Small Business and Not-For-Profit Employees and Owners
Hello! I am wondering why on this page it says the contribution to a SEP IRA is the lesser of 25% covered compensation or $57,000 (2020), but then it says the combined contribution for SEP IRA and qualified plans cannot exceed the lesser of 100% covered compensation or $57,000 (2020). Could you explain the discrepancy between the two statements?
Great question. SEP IRA contributions “count” against the qualified plan contribution limit. For example, assume Jane Doe (age 45) earned $100,000 in 2020 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 $57,000 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 $32,000 (57,000 less 25,000).
Let me know how fully that addresses your question.
Onward and Upward,