Reaching Your SEP Peak: Understanding Maximum Contribution Limits

What is the maximum contribution I can add to a SEP?

The maximum amount that can be contributed to a SEP (Simplified Employee Pension) IRA is determined by the lesser of two limits: contribution percentage or dollar amount limit.

For the contribution percentage limit, the contribution rate must be the same for all eligible employees, based on the employee's compensation. In general, you may contribute up to 25% of an employee's compensation, up to a maximum of $290,000 for 2021.

For the dollar amount limit, the maximum contribution limit for 2021 is $58,000 or 25% of your compensation, whichever is less. Note that this is an aggregate limit for all participants, including yourself as the business owner.

In other words, a self-employed individual with no common law employees can contribute up to 25% of their compensation up to a maximum of $58,000 for 2021. If the business owner has common law employees, they must also be covered under the SEP and receive an employer contribution. The percentage of contribution for the employees must be the same as that for the owner.

It's essential to keep in mind that the contribution limits are subject to change and may be adjusted annually due to cost-of-living adjustments. It is always advisable to consult with a financial advisor or tax professional to determine the maximum amount that can be contributed to a SEP IRA based on your individual circumstances.