How much can I save in my small biz retirement plan?

By Karin Price Mueller | NJMoneyHelp.com for NJ.com



Q. I am a sole proprietor and want to add to my SEP-IRA. Can I take after-tax funds from my savings and use that to make a contribution? What are the limits?


— Working hard


A. It’s great to see you want to set money aside for the future.


A SEP-IRA is a pension plan that self-employed people and small businesses can open for themselves and their employees.


If the business owner wants to take a tax deduction for their own SEP contribution, then the business owner must contribute to all eligible employees SEP accounts, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.


The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of: 25% of compensation, or $58,000 for 2021 ($57,000 for 2020), he said.


“If the business consists of only the owner without any other employees, then the owner only has to contribute to their own SEP account,” he said, noting that the easiest way to open a SEP account is to complete IRS Form 5305-SEP. You then open a SEP account at any bank or brokerage firm.


“In order to receive the tax deduction, you must fund the SEP account,” he said. “You can fund it with cash from the business bank account or even your own cash from your own bank account.”


This story was updated with new compensation numbers.


Email your questions to Ask@NJMoneyHelp.com.


Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.

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