SEP IRA Contribution Limits in 2024
The SEP IRA contribution limit for 2024 is the lesser of 25% of an employee's eligible compensation or $69,000. That is the same ceiling that applied in 2023 ($66,000), adjusted upward for inflation. Compensation includes wages, salaries, commissions, and net self-employment income, but excludes certain employee benefits and non-cash payments. For self-employed individuals, the calculation uses a slightly different formula to account for the deduction for half of self-employment tax, which can make the effective limit a bit more complicated than the headline $69,000 figure.
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How the Calculation Works for the Self-Employed
If you are self-employed, you cannot simply multiply your net earnings by 25%. Instead, you calculate your SEP contribution using your net earnings from self-employment minus one-half of your self-employment tax, then multiply that amount by 25%. For example, if your net self-employment earnings are $100,000 before the deduction for half of SE tax, your contribution limit works out to roughly 20% of your net earnings from self-employment. This is a common stumbling block, and getting it wrong can lead to excess contributions that trigger IRS penalties.
Who Can Set Up a SEP IRA
Any business owner with one or more employees can open a SEP IRA, including sole proprietors, partnerships, and corporations. You must be self-employed or have employees who meet certain eligibility requirements: they must be at least 21 years old, have worked for you in three of the last five years, and have received at least $750 in compensation during the current year. Even if you have no employees, you can still set up a SEP IRA for yourself as a sole proprietor or independent contractor. Employer contributions are 100% vested immediately, meaning employees own the money as soon as it is contributed.
Deadlines and Timing
The deadline to make SEP IRA contributions for a given tax year is the tax filing deadline for that year, including extensions. For the 2024 tax year, that means you have until October 15, 2025, if you file an extension. This is one of the latest deadlines of any retirement plan, which makes the SEP IRA attractive for small business owners who wait until the last minute. Contributions can be made in a lump sum or in installments, but the total for the year cannot exceed the annual limit.
SEP IRA vs. Other Retirement Plans
The SEP IRA's high contribution limit makes it appealing compared to a traditional or Roth IRA, which is capped at $7,000 for 2024 ($8,000 if you are age 50 or older). A SIMPLE IRA has a lower limit of $16,500 in 2024 ($20,000 withcatch-up for those 50 and older), but it is designed for smaller employers who want an easier administration path. A solo 401(k), also known as an individual 401(k), allows both employee and employer contributions and can permit higher total contributions than a SEP IRA for some self-employed individuals, but it comes with more complex reporting requirements and the possibility of requiring a formal plan document.
| Plan Type | 2024 Contribution Limit | Best For |
|---|---|---|
| SEP IRA | 25% of compensation or $69,000 | Small employers, self-employed |
| SIMPLE IRA | $16,500 ($20,000 catch-up) | Small businesses with 100 or fewer employees |
| Solo 401(k) | Employee + employer up to $69,000 | Self-employed with no employees |
| Traditional / Roth IRA | $7,000 ($8,000 catch-up) | Individuals without a workplace plan |
Required Documentation
To establish a SEP IRA, you must adopt a written SEP agreement, either through a prototype plan provided by a financial institution or an individually designed plan. The agreement must cover all employees and specify the contribution formula. While the IRS does not require you to file any special form to set up the plan, you must file IRS Form 5498 each year to report contributions made to participants' SEP IRAs. The plan document must be in place by the tax filing deadline, including extensions, for the year in which you make contributions.