SEP IRA limits
Originally Posted by jaerco
I am a bit confused. I am an independent contractor and max out my pretax contributions, this year it will be 44,000. Can't I do that with a SEP or solo 401k? The paper work for the SEP seems pretty simple.
A SEP IRA owner may contribute up to 25% of compensation, as much as $42,000 for 2005 ($44,000 for 2006). However, the maximum compensation upon which SEP contributions can be based is $210,000 (220,000 for 2006). The term "compensation" for self-employed individuals refers to earned income.
You can contribute up to $14,000 for 2005 and $15,000 for 2006 through salary deferral, although this may not exceed 100% of pay. The employer profit sharing contribution limit is up to 25% of pay. There is a total contribution limit, from both sources, of $42,000 in 2005, but only income up to $210,000 can be considered for 2005 and 220,000 for 2006.
However, under a “catch up” provision, individuals age 50+ may contribute an additional $4,000 in salary deferrals beyond the $14,000 in 2005 and $5000 in excess of $15,000 in 2006, allowing for a total contribution limit of $46,000 in 2005 and $49,000 for 2006.
(If I recall correctly, the 25% figure for the 410k and SEP plans may be actually 20% if a solo proprietorship, but the total maximum dollar amounts are the same.)
An example for 2006:
100,000 income age 45, solo401k option
15,000 in personal contributions
25,000 in "employer" contributions (25% of 100,000)
Total in 401k is 35,000.
100,000 income age 45, maximum SEP IRA option
25% income, or 25,000 total in SEP
If you use the 20% of income figure, this example still favors the solo 401k.
Also, there is no catch up provisions if you are over 50 for the SEP.
Edit: This is over simplified, read IRS publication 560 from the www.irs.gov website for more info.