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 $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?

Thanks,

Elizabeth

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 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,

Bruce

 

Posted in Student Question

About Bruce Starks, CPA, CFP®