2012 Simple IRA and SEP IRA Contribution Limits – Small Business Retirement Plans

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The IRS has released 2012 contribution limits and updated eligibility rules for two of the most popular small business retirement plans : the SEP IRA and Simple IRA. SEP IRA. 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. For 2012, the annual contributions an employer makes to an employee’s SEP-IRA cannot exceed the lesser of:

  • 25% of compensation, or
  • $50,000 (vs. $49,000 in 2011). This is an $1000 increase from last year
  • Up to $250,000 (vs 245,000 in 2011) of an employee’s compensation may be considered

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) and you have up to April 15, to contribute for the past year’s SEP-IRA. A SEP provides high maximum contribution limits and relatively low setup cost, but an employer sponsored Individual 401k may allow a greater contribution at the same income level. Also, for those age 50+ there isn’t an additional $5,500 catch-up contribution provision like there is with the Individual 401k. A final point to consider is IRS rules do not permit loans with a SEP-IRA. There is no harm starting with a SEP-IRA and then converting to an Individual 401k. All that is needed to transfer retirement assets from a SEP IRA to a new Individual 401k is some minor administrative paper work.

Looking for options to open a low cost, easy to administer SEP IRA or Simple IRA for yourself and/or your employees? Then consider opening a no-fee SEP or Simple IRA retirement account with TD Ameritrade to reduce your taxable income and tax effectively build your retirement savings.  (Select the SEP IRA or Simple IRA account type)


SIMPLE IRA

A simple IRA is also a small business IRA-based plan with a simplified method for employers to make direct contributions toward their employees’ retirement and their own retirement. Employees may choose (not mandatory) to make regular contributions and the employer makes matching or non-elective contributions. SIMPLE IRAs are ideally suited as a start-up retirement savings plan for small employers who do not currently sponsor a 401K retirement plan. The main advantage of a Simple IRA to other tax advantaged retirement plans is the much lower administration costs. In order to establish a SIMPLE IRA, the business must have 100 or fewer employees and it also cannot have any other type of retirement plan in place.

2012 Contribution Limits: An employee may defer up to $11,500 for 2012, with employees over age 50 allowed to make a catch-up contribution of up to $2,500 (for a total of $14,000). Contributions under a SIMPLE IRA plan that count toward the overall annual limit on elective deferrals an employee may make to tax advantaged retirement plans. The employer is generally required to match each employee’s salary reduction contribution on a dollar-for-dollar basis up to 3% of the employee’s compensation.

SEP vs Simple IRA plans

SEP vs Simple IRA plans

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{ 3 comments… read them below or add one }

Brian Ross August 8, 2012 at 11:46 am

I have switched jobs mid year. My old employer had a 401K where I had invested $11,450 for the year. My new employer has a simple IRA where the max is $12,500+$2500 catch up. How much can I contribute to the new plan?

Thank you

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Ted March 1, 2012 at 5:10 pm

My question is: I am a full time employee. I make my maximum contribution to 401K plan now. I get 5% employer matching contribution. I was thing to reduce my contribution with my employer enough to get their matching and contribute the rest to my other Indv. 401K outside of my employer’s. I do have side business that I bring in 1099 Misc. and was allowed to open a Solo 401k.
Can I do that?

Thanks in advance for your help.

Reply

andys2i March 2, 2012 at 9:27 pm

You can do that, but what is the rationale behind that? Do you have better investment choices than your employer sponsored 401K? After all your 401K contributions are tax free at your employer and via your business. Do the math before making this change.

Solo and SEP IRA accounts have higher contribution limits, so they maybe a good option after you reach the limit at your employer.

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