SEP Contributions for Sole Proprietorship

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yeungfamilyFIRE
Posts: 2
Joined: Wed Jun 13, 2018 10:12 am

SEP Contributions for Sole Proprietorship

Post by yeungfamilyFIRE » Wed Jun 13, 2018 10:31 am

Background,
Annual income 200k from employment
Business Income 50k -1099

Maxed employer 401k - 37k (spouse and I)
Maxed backdoor Roth - 11k(spouse and I)
Maxed HSA -$6,900

Questions
1. From my business income i can contribute 20% of that 50k= 10k to the SEP and convert to Roth?
2. Is my SEP contribution based only on business income of 50k or can I include my normal work income and contribute more to the SEP?

Thanks for any advice.

pshonore
Posts: 6419
Joined: Sun Jun 28, 2009 2:21 pm

Re: SEP Contributions for Sole Proprietorship

Post by pshonore » Wed Jun 13, 2018 11:57 am

Limit is 20% of (net business income after any expenses, adjusted by 1/2 of SE resulting from the business)

No to the normal work income.

SRenaeP
Posts: 736
Joined: Tue Jan 19, 2010 9:05 pm

Re: SEP Contributions for Sole Proprietorship

Post by SRenaeP » Wed Jun 13, 2018 12:15 pm

yeungfamilyFIRE wrote:
Wed Jun 13, 2018 10:31 am
Background,
Annual income 200k from employment
Business Income 50k -1099

Maxed employer 401k - 37k (spouse and I)
Maxed backdoor Roth - 11k(spouse and I)
Maxed HSA -$6,900

Questions
1. From my business income i can contribute 20% of that 50k= 10k to the SEP and convert to Roth?
2. Is my SEP contribution based only on business income of 50k or can I include my normal work income and contribute more to the SEP?

Thanks for any advice.
Why contribute to a SEP then convert to Roth? The net of those actions is paying taxes on the income, which I assume you're trying to defer.

If you're concerned about prorata for your backdoor Roth, consider contributing to a SEP then rolling into your 401k.

DSInvestor
Posts: 10848
Joined: Sat Oct 04, 2008 11:42 am

Re: SEP Contributions for Sole Proprietorship

Post by DSInvestor » Wed Jun 13, 2018 12:31 pm

SEP-IRA assets can be converted to Roth IRA at any time. However, the conversion is taxable and if your income is high enough for you to consider backdoor into Roth IRA, the conversion income may be taxed at a high rate Fed and state. If you choose to lower your current tax liability and not convert those SEP-IRA assets to Roth, Solo 401k would be a much better option.

Assuming you do not convert SEP-IRA assets, SEP-IRA assets are counted by form 8606 and your Roth conversion step of the backdoor into Roth IRA will be treated as a partial conversion of your IRA assets (SEP-IRA + TIRA) forcing proration of IRA basis. This results means you will be taxed on a portion of your conversion. The more SEP-IRA assets, the more of your Roth conversion will be taxable. This adds complexity over time as you will need to carefully track your IRA basis to avoid double taxation well into retirement and beyond assuming you do not zero out your TIRA/SEP-IRA accounts. Solo 401k assets are not counted by form 8606 so you can avoid these complications and use the backdoor into Roth IRA with ease.

Solo 401k employer profit share contribution is the same amount as that permitted by SEP-IRA. Be aware that Solo 401 has a requirement to file form 5500-EZ once your plan assets exceed 250K which may take quite a bit of time assuming you're contributing around 10K/yr (based on 50K of sole proprietor net business income).



Fidelity has a great solo 401k plan.
Wiki

yeungfamilyFIRE
Posts: 2
Joined: Wed Jun 13, 2018 10:12 am

Re: SEP Contributions for Sole Proprietorship

Post by yeungfamilyFIRE » Wed Jun 13, 2018 1:28 pm

SRenaeP wrote:
Wed Jun 13, 2018 12:15 pm

Why contribute to a SEP then convert to Roth? The net of those actions is paying taxes on the income, which I assume you're trying to defer.

If you're concerned about prorata for your backdoor Roth, consider contributing to a SEP then rolling into your 401k.
My employer 401k is high expense with limited investment options so i want to avoid rolling it into there. They also dont allow in service rollover so i cannot move that money to my own 401k

Goal is to maximize tax advantaged retirement savings.

I'm currently 36. Even at a high tax bracket, it would be more advantageous to take the tax hit now vs 65 1/2 and beyond?

I also maybe doing it all wrong...

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serbeer
Posts: 1112
Joined: Fri Dec 28, 2007 2:09 pm

Re: SEP Contributions for Sole Proprietorship

Post by serbeer » Wed Jun 13, 2018 6:02 pm


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