2022 SEP IRA Contribution Limits and Eligibility Rules With Same Year 401K And IRA Contributions

[Updated for 2022 limits in 2023 filings] A year or so after starting my small business and completing my first annual tax return that showed a slight profit, my accountant advised that I start looking into a retirement account/plan for my business in order to lower my overall tax bill and also effectively set aside some of my business profits towards retirement.

After doing my research on small business retirement plans I found that if you’re a one person employee/owner business or a small employer with only a handful of employees, a SEP IRA is the best option because it is relatively easy to setup and administer with most large brokers.

The other good option is the Solo 401K plan, which has lower annual contribution limits but benefits if you have multiple employees as you’ll see in the following sections.

Further since I was still doing my 9-to-5 job while growing my side/small business, I was able to have both a SEP IRA and 401K plan that I get from my employer without any adverse tax impacts and essentially double my pre-tax contributions.

Here are some more details and rules around SEP IRA plans you need to be aware of.

What is a Simplified Employee Pension (SEP) or Retirement plan?

A SEP is a popular and widely used retirement plan management approach because it provides self employed owners or small business owners with a few staff a simplified method to make contributions toward their employees’ retirement and, if self-employed, their own retirement.

Contributions are made directly to an Individual Retirement Account or Annuity set up for each employee (a SEP-IRA). Various brokers provide IRA accounts for small business’.

I personally use and recommend using Fidelity or Vanguard as they have the most investment options and take care of most of the administration. See sections below on some of the IRS forms/declarations the employer needs to make to open/run a SEP IRA plan.

Its important to note that contributions can be made to a SEP IRA with self employment income even if you participate in a 401k, 403b, or 457 or other retirement plan.

This allows you to significantly boost you pre-tax retirement savings and reduce taxable pass-through business income taxes.

Who is Eligible for a SEP IRA?

Any employer can establish a SEP and is independent of company/incorporate type. However the tax advantages and administrative costs can vary based on incorporation rules. An eligible employee for a SEP IRA is one who meets the following requirements:

* attained age 21;
* has worked for the employer in at least 3 of the last 5 years;
* has received the annual minimum compensation amount (see table below) over the last two years from the employer for each year

Like a traditional IRA plan, contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur a 10% IRS penalty as well as income taxes.

SEP IRAs Only Allow Employer Contributions

While traditional and Roth IRAs are accounts most of us set up on our own, outside our workplaces, SEP IRAs are tied to our jobs. A SEP is set up by an employer (including a self-employed person) and permits the employer (not the employee) to make contributions to the SEP IRA accounts of eligible employees.

The employer gets a tax deduction for contributions made, and the employee is not taxed on those contributions, though their eventual withdrawals will be taxed at their income tax rate.

Of course, a self-employed person is both employer and employee in this case, so he or she funds their own account.

SEP IRA vs Solo 401K

The one potential drawback with a SEP IRA for small business’ with multiple employee is that the employer contribution must be the same to ALL employee accounts.

This means you cannot contribute more to one employee (e.g. yourself) and much less to others, which can be a problem for business that have employees on varied wage bases.

If you want to have variable contributions then a Solo 401K plan may be better for your business, but that has lower overall limits (in line with regular IRAs) than a SEP IRA

Contribution Limits for SEP IRA plans 

The same limits on contributions made to employees’ SEP-IRAs also apply to contributions made to a self-employed individual’s SEP-IRA. 

Contributions must be made in cash (no stock). The contribution deadline is usually April 15 or the tax deadline of the following year — i.e., you have up to April 15, to contribute for the past year’s SEP IRA. The table below shows the SEP contribution limits over the last few years along with some other key figures

SEP Employer Contribution Limit$61,000 or 25% of compensation$58,000 or 25% of compensation$57,000 or 25% of compensation$56,000 or 25% of compensation
SEP Minimum compensation$650$650$600$600
SEP Annual Compensation Limit$305,000$290,000$285,000$280,000
SEP Contribution DeadlineApril 15, 2023April 15, 2022May 17, 2021Jul 15, 2020

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Can catch-up contributions be made to a SEP?

Generally No. SEPs are funded by employer contributions only. However, catch-up contributions can be made to the IRAs that hold the SEP contributions if the SEP-IRA documents allow.

Sep IRA contribution deadline

The deadline to establish a SEP IRA is generally the tax deadline (including any extensions) of the following year. E.g. for 2020 SEP IRA plans, the plan creation and contribution deadline is May 17, 2021.

Some employers may have earlier deadlines to ensure they can make the required employee contributions and to align with business operations/cashflow constraints.

What if the Employee already contributes to another 401K or IRA Plan? Can they also contribute to a SEP IRA?

You ARE eligible to contribute to a SEP IRA even if you are already covered by a separate 401(k) retirement plan at your full-time job or have retirement plans from other employment sources. The IRS has confirmed this in their FAQ about SEP plans – “Yes, you can set up a SEP for your self-employed business even if you participate in your employer’s retirement plan at a second job.”

However if a SEP IRA and 401K plan are offered by the same employer (e.g a small business with multiple employees) then the individuals aggregate contributions will be limited to the maximum SEP IRA limits shown above.

Are 401(k) or SEP IRA contribution limits the same or different?

No, contributions to a SEP plan are not reduced by contributions to a 401(k) plan, or vice versa. But this is only the case if the employers are different and have no affiliation.

If that is the case you can max out your SEP IRA plan AND your 401k contributions. This is a big tax break that many higher income folks with multiple streams of income use to get their pre-tax retirement savings to over 85,000 per year!

Real-life example: Mark has a side hustle where he provides IT consulting to small business. His day job is as a project manager in a bank where he is a full time, salaried (W2) employee.

Mark has incorporated (as an S-Corp) his IT consulting business where he is the owner and sole employee. As the “employer” he can make contributions to his SEP IRA plan up the maximum amount, subject to income considerations discussed above. He can also contribute the maximum in to the 401(k) plan at this day job.

What happens to my SEP IRA if I close my business?

Since the employee owns the SEP IRA plan (and all employer contributions) they will own all the funds already in that plan even if the employer stops contributing because the employees leaves, stops earning income from the business or the business closes.

Naturally you will not be able to continue to make contributions to that SEP IRA after this point since contributions are based on active earnings from that business.

How is a SEP officially established (IRS guidance)?

A SEP is established by adopting a SEP agreement and having eligible employees establish SEP-IRAs. There are three basic steps the IRA requires in setting up a SEP, all of which must be satisfied according to the IRS.

  • A formal written agreement must be executed. This written agreement may be satisfied by adopting IRS Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. Banks, insurance companies, and other qualified financial institutions have templates/prototypes to help you with this.
  • Each eligible employee (if you are not a solo business owner) must be given certain information about the SEP. If the SEP was established using the Form 5305-SEP, the information must include a copy of the Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions.
  • A SEP-IRA must be set up for each eligible employee (unlike a Solo 401k). SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Fidelity and Vanguard both offer good options. The SEP-IRA is owned and controlled by the employee and the employer sends the SEP contributions to the financial institution where the SEP-IRA is maintained.

A SEP can be set as late as the due date (including extensions) of the business’s income tax return for that year (see deadline discussion above). Unlike a 401k where the employer has to file a IRS Form 5500, a SEP IRA is much easier to establish which makes the administrative overhead much more manageable.

If you’ve contributed more than the annual limits to an employee’s SEP-IRA, you can see this IRS procedure to correct your over contribution.

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15 thoughts on “2022 SEP IRA Contribution Limits and Eligibility Rules With Same Year 401K And IRA Contributions”

  1. I have always contributed to my SEP IRA based on being a sole proprietor. This year, due to COVID I expect to collect unemployment benefits in lieu of much of my income. Can I use these benefits in my “earnings” calculations when determining the maximum contributions possible?

    • No – Unemployment benefits are technically not earnings, because work does not have to be performed to receive benefits. This means unemployment benefits are a form of unearned income rather than earnings.

  2. I am self-employed (no employees). I already max out my Roth, and want to start a SEP. What paperwork is required to get started, just the agreement I set up with the company I choose to invest with? And what paperwork do I have to file, expect to receive from that company at the end of the year, or from IRS each year? thanks

    • Yes. Per the article for this year “. The contribution deadline is usually April 18 (tax due date) of the following year — i.e., you have up to April 18, to contribute for the past year’s SEP IRA. ”

      I would ensure you contact your SEP IRA provider (eg. Fidelity or Vanguard) to make sure they apply your contributions for the right year. I have had issues with this in the past.

  3. Can the eligibility requirements for a SEP be changed from 1 year to the next? For example, the current requirement is to have worked .75 of a year; can that be changed to .5 so that an employee hired in June can be included?

    • Short answer is yes. Per the IRS you can initially establish your SEP plan so that you are immediately eligible to participate in the plan. Later, you can amend the plan to have more restrictive or expansive eligibility requirements, but must grandfather in existing employees.

    • I have included a link in the article above to correct SEP IRA contribution mistakes. But basically per the IRS you need to pay back the contribution and gains made in error and file a corrected form 1099-R

  4. This comment is in response to PaddyMac’s 20% vs 25% remark.

    Let us say your total revenue is 100,000. You can take a gross income of 80,000 and put 20,000 in SEP IRA. That is 20% of your revenue. However, your contribution is 25% of your gross income.

    So, it is all the same thing. The percentage just depends on whether it is on total revenue or gross income.

  5. If i have employees, as a self-employed individual do i must include them in the SEP or can i elect to only contribute to my SEP account and not to my employees even though they qualify?
    Please advise

  6. sense health insurance is deductible on the form se in 2010 how well that effect the amount that can be contributed to a sep ira for the self employed? ps the 560 pub on the irs set is a 2009 pub


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