SepIRA

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Bernard
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SepIRA

Post by Bernard » Mon Jun 29, 2020 7:32 pm

I'm self-employed, the wife is employed. We max out our Traditional IRAs and her 401K. That allows us to keep our AGI rather low.

Now my business partner wants to retire, and our commercial building is in escrow. I'll get a few hundred thousand dollars from the sale of which very little should be capital gains (as we bought it in 2007). I'll also get money from the business inventory, most likely $150K or more, all of which is taxable.

In order to avoid being hit by a huge income tax bill, I want to open a SepIRA for tax year 2020. I have no idea what my "income" will be until later this year, but the way I understand it, I can't put more than $57,000 in it, which is easy, but the contribution can also not be higher than 25% of my earned income for this year? If so, that's going to be tricky math before I'm able to do my taxes for 2020.

What's your advice for me? What can or should I do to keep my tax burden low?

Thanks!

Northern Flicker
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Re: SepIRA

Post by Northern Flicker » Tue Jun 30, 2020 12:57 am

When you prepare your taxes for 2020, the SEP-IRA contribution amount will be calculated by any tax preparation software used by you or a professional tax-preparer. You then have until the due date for the return to make the contribution.

You cannot due both traditional IRA and SEP-IRA contributions in the same year, but you can do both Roth IRA and SEP-IRA contributions in the same year.

A solo 401K may enable a greater deferral of income than a SEP-IRA, but is more complex to set up and administer. SEP-IRAs are not much more complex than a traditional IRA.
Risk is not a guarantor of return.

niceguy7376
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Re: SepIRA

Post by niceguy7376 » Tue Jun 30, 2020 9:36 am

Bernard wrote:
Mon Jun 29, 2020 7:32 pm
I'm self-employed, the wife is employed. We max out our Traditional IRAs and her 401K. That allows us to keep our AGI rather low.
I am curious as to what income range you two are in when you are able to deduct a trad ira even with spouse having a 401k.
What is a normal yearly self employed income for you?
I assume it is a S Corp or C corp than a Sole Prop as you mention a business partner.
In that case, can you by yourself open a SEP IRA without having one for the partner? Are you going to be the sole owner of the business when your partner retires or are you both selling off the business?

I am trying to understand the current company structure, who owns the building and inventory and how you are compensated on the sale of building and inventory.

dkturner
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Re: SepIRA

Post by dkturner » Tue Jun 30, 2020 10:54 am

Your situation sounds pretty complex. I think you would be in better hands if you ask your questions to a good CPA rather than rely on opinions posted by anonymous individuals on a index investing website.

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vitaflo
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Re: SepIRA

Post by vitaflo » Tue Jun 30, 2020 11:03 am

Bernard wrote:
Mon Jun 29, 2020 7:32 pm
In order to avoid being hit by a huge income tax bill, I want to open a SepIRA for tax year 2020. I have no idea what my "income" will be until later this year, but the way I understand it, I can't put more than $57,000 in it, which is easy, but the contribution can also not be higher than 25% of my earned income for this year? If so, that's going to be tricky math before I'm able to do my taxes for 2020.
This is why I wait until I do my taxes to figure out my SEP contribution for the year. It requires knowing your income to know what the max contribution is (actually it's even more complicated than that as it has some recursive self-employment tax formula in it too). So when I do my taxes in Feb, I figure out what my max SEP contribution will be, based on all the tax info I have, and then make sure I do the contribution before April 15. You don't have to actually have made any contributions before you do your taxes. You just figure out what the contribution is going to be, put that number on you tax form, and make sure you do it before mid-April.

JonnyB
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Re: SepIRA

Post by JonnyB » Tue Jun 30, 2020 12:01 pm

Northern Flicker wrote:
Tue Jun 30, 2020 12:57 am
You cannot due both traditional IRA and SEP-IRA contributions in the same year, but you can do both Roth IRA and SEP-IRA contributions in the same year.
Sure you can. You can make your employer contribution up to 20% of business income to the SEP. You can also make your annual $6K or $7K traditional IRA contribution. Deductibility of the traditional IRA will be subject to the usual income limitations. Your employer contributions to your SEP and your employee contributions to a traditional IRA are separate.

Northern Flicker
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Re: SepIRA

Post by Northern Flicker » Tue Jun 30, 2020 3:33 pm

JonnyB wrote:
Tue Jun 30, 2020 12:01 pm
Northern Flicker wrote:
Tue Jun 30, 2020 12:57 am
You cannot due both traditional IRA and SEP-IRA contributions in the same year, but you can do both Roth IRA and SEP-IRA contributions in the same year.
Sure you can. You can make your employer contribution up to 20% of business income to the SEP. You can also make your annual $6K or $7K traditional IRA contribution. Deductibility of the traditional IRA will be subject to the usual income limitations. Your employer contributions to your SEP and your employee contributions to a traditional IRA are separate.
You are correct.
Risk is not a guarantor of return.

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Bernard
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Re: SepIRA

Post by Bernard » Tue Jun 30, 2020 6:03 pm

Thank you all, that was very helpful. I'm delighted that I can still feed my traditional IRAs and a SepIRA at the same time. Come tax time, I should have figured out my income for 2020 and thus I should be able to establish how much money I can put into the Sep. It's probably a good idea to seek the help of a tax professional for that specific year.

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