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SMALL BUSINESS
JULY 1, 2020

How much can I contribute to my SEP IRA?

Answered by
Judith Anderson
Senior Vice President, Retirement & Personal Wealth Solutions, Bank of America
Whether you're self-employed or a business owner with employees, you may be able to contribute to a Simplified Employee Pension, or SEP IRA. The maximum contribution limit for 2020 is $57,000 ($56,000 for 2019), or 25% of your employees' eligible compensation (or, for your own contribution, 20% of your net earnings from self-employment, as determined under the SEP IRA rules),Footnote 1 whichever is less. Employees cannot contribute directly to a SEP IRA. Only you as the employer can make contributions, which are generally tax deductible for your business. Depending on your circumstances, you may be able to contribute significantly more to a SEP IRA than to a traditional IRA, allowing more to be saved for retirement.

What other potential advantages do SEP IRAs offer?

SEP IRAs are a flexible choice for business owners. Each year, you decide how much to contribute to each of your eligible employee's SEP IRA, depending on your capacity. Because SEP IRAs don't require yearly contributions, SEP IRAs may be a feasible option for businesses with variable cash flow. Additionally, SEP IRAs require less paperwork than many small business retirement plans.
With a SEP IRA, the interest, dividends, employer contributions and other investment earnings have the potential to grow, federal income tax-deferred, until they're withdrawn during your retirement. You also may be able to consolidate retirement assets by rolling over a traditional IRA or accounts held in former employers' 401(k), 403(b) and governmental 457(b) plans into a SEP IRA. A SIMPLE IRA may be rolled over into a SEP IRA as well, as long as you've held your SIMPLE IRA for at least two years (beginning with the year in which the first contribution is made to the account). Of course, consolidating retirement assets isn't right for everyone. Consider all your choices before deciding whether rolling over may be right for you.Footnote 2
"SEP IRAs are a flexible choice for business owners. Each year you decide how much to contribute, depending on your capacity."
— Judith Anderson, Senior Vice President, Retirement & Personal Wealth Solutions, Bank of America
One more note: SEP IRA contribution limits are subject to an annual cost-of-living adjustment and may vary from year to year. In addition, the limits on contributions to an owner-employee's account and deductions for those contributions may vary based on your net earnings from self-employment and self-employment tax deduction.
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Footnote 1 The maximum compensation that can be taken into account for purposes of this calculation is $285,000 per participant in 2020 ($280,000 in 2019).

Footnote 
You have choices about what to do with your employer-sponsored retirement plan accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over to an IRA or convert to a Roth IRA, roll over an employer-sponsored plan from your old job to your new employer, take a distribution, or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and different types of protection from creditors and legal judgments. These are complex choices and should be considered with care. Visit our Rollover IRA page or call a Merrill rollover specialist at 888.637.3343 for more information about your choices.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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