Why Rising 2018 SEP IRA Limits Could Make These Retirement Plans More Popular
401(k) plans are popular among major employers that want to help their employees save for retirement, but not every employer has the resources to create a full-blown 401(k) plan. SEP IRAs are a great alternative that smaller businesses and self-employed individuals can use as a retirement plan. Contribution limits for SEP IRAs rise with inflation, and a $1,000 boost to the maximum contribution for 2018 will make them even more valuable for some workers. The combination of simplicity and savings that SEP IRAs offer makes them an option that many employers that currently don't offer retirement plans should look into more closely.
Contribution limits for SEP IRAs are quite high compared to some other retirement plans. Employers are allowed to contribute up to 25% of the salary that they pay each employee, with an annual maximum limit that applies to high-income workers. For 2018, the maximum contribution allowed is $55,000, up from 2017's $54,000. That will mark the second straight year that SEP IRA limits have risen after a break in 2016 due to low inflation levels.
For salaried workers, calculating 25% of compensation is trivial, but the calculation is more complicated for self-employed entrepreneurs. The limit is calculated based on net self-employment income, which takes gross income but then removes both the SEP IRA contribution itself and the portion of self-employment tax that's allocable to the employer's payroll tax liability. After running the numbers, the limit is 20% of adjusted profit after taking out self-employment tax, or slightly less than 20% of your original gross income.
Source: Fool.com
