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Visitor II

SEP IRA -- Question re maximizing

Hi Community.  I have a question -- I have a small business (sole proprietor) and I've got my total revenue from that business, and my net income and I have a SEP IRA set up.  I clicked "maximize" to get TT help determining my total allowable contribution;  however, interestingly (to me anyway), the calculation spits out a number which is approximately 19% of my net income -- I was expecting that it was going to be 25%.  Is there something weird about this or is there an easy answer.  Thanks all! 

1 Comment
TurboTax Specialist

SEP IRA -- Question re maximizing

25% of your net earnings is the maximum amount for a SEP contribution, but the calculation is really based on your net income after your contribution. Sounds a little circular no? In the Sep IRA contributions section, click the maximum amount link for an explanation of the calculation.  Here's an example from the software:

 

Net Profits ($49,000, for example) MINUS
1/2 self-employment tax ($3,462) EQUALS
Adjusted Net Earnings ($45,538) 
TIMES 20% EQUALS
YOUR ALLOWABLE CONTRIBUTION: ($9,108)

 

You probably noticed that we multiplied by 20% instead of 25%.That's sometimes referred to as an Equivalent Percentage. What it does is take into account that your Keogh deduction is reducing the income your deduction is based on and factors that in. (These percentage references to the plans can drive you a little nuts. This is usually referred to as a 25% contribution. But since you're self-employed -- and your income gets reduced by the contribution -- it is really 25% of the income left after the contribution.)