SEP help please!

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Topic Author
countdown
Posts: 114
Joined: Thu Jun 27, 2013 2:13 pm

SEP help please!

Post by countdown »

Appreciate any help re the SEP IRA contributions, plural, issue. As a sole proprietor, no employees, business owner, if an individual does NOT make any SEP IRA employer contributions for self as 'employer contribution', but does wish to make the SEP IRA 'employee contribution'', for self of $6500, is this appropriate?

I have conflicting opinions.....the contra is that if no employER SEP contrib, the employer/employEE would have to make the $6500 contrib via a TIRA.

Any experience with this? Thank you in advance.
DSInvestor
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Re: SEP help please!

Post by DSInvestor »

SEP-IRA contributions are employER contributions. However SEP-IRA accounts can also accept employee contributions and these would be treated as Traditional IRA contributions subject to the $5,500 contribution limit $6,500 if over age 50. Note that SEP-IRA is an employer plan and if you're covered by an employer plan, there is a MAGI limit to take the tax deduction for traditional IRA contributions. The regular employer SEP-IRA contribution is tax deductible no matter how high your income. If you cannot take get the Traditional IRA tax deduction, you should consider contributing to Roth IRA.

Note that Traditional IRA or Roth IRA contributions are allowed above and beyond the employer SEP-IRA contribution. For example, if your net business income was 50K, you'd be allowed to contribute:

SEP-IRA (employer contribution) ~10K
Traditional IRA or Roth IRA $5,500 (under age 50)
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countdown
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Re: SEP help please!

Post by countdown »

DS...thank you....I think I'm following, but want to confirm:

Assume instead of $50k net on bus, the bus is winding down with little to no net profit.
So no employer contribution.

So is the employer, who is also the sole employee of the business then able to deposit $6500 (over 55) into employee SEP IRA box on the Vanguard site in an already established SEP, or does the owner (who is also the employee for this example) have to open a new TIRA to deposit $6500.

You may have answered that above, but I guess I am confused reviewing the Vanguard tax website indicating the allowed contributions within a SEP plan.

Thanks so much for your consideration and reply.
pshonore
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Re: SEP help please!

Post by pshonore »

I believe you need earned income (either Schedule C profit) or W2 wages or spousal earnings to make any kind of retirement contribution.
DSInvestor
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Re: SEP help please!

Post by DSInvestor »

OK, it sounds like you're not going to have any schedule C net business income. In order for you to be eligible for IRA contribution, you and/or your spouse must have taxable compensation equal to or greater than your IRA contributions. Assuming you have at least $6,500 in taxable compensation, you'd be eligible to contribute to Traditional IRA. That contribution can go into a Traditional IRA or a SEP-IRA account as an employee contribution. IMO, the cleaner way to do this is via a Traditional IRA account. This way there is no confusion about employer vs employee contribution. The employer contribution is calculated differently from the employee contribution.

If you have $6,500 in taxable compensation but are in a low or zero tax bracket, you'd receive little to no tax benefit for the Traditional IRA contribution, so you may want to consider $6,500 contribution to Roth IRA instead.

You always have the option of consolidating your SEP-IRA assets into your new Traditional IRA. That move would be tax free. If you now have very low income, examine your tax situation to see if you can convert to Roth IRA with little or no tax cost.
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countdown
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Re: SEP help please!

Post by countdown »

Ok....yes, we are on same page.
So assuming plenty of spousal income and max 401k on that end, and solo business other spouse with net profits just >$6500, then $6500 deposit could appropriately go either as employee deposit in SEP IRA acct, or as a new TIRA, and later consolidate. I think that's what you said. That is how I understand it as well.

'Add a fact' always changes the scenario bit :happy

I agree it is cleaner in the TIRA. Thank you so much for your time and input.

Best regards.
DSInvestor
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Joined: Sat Oct 04, 2008 11:42 am

Re: SEP help please!

Post by DSInvestor »

countdown wrote:Ok....yes, we are on same page.
So assuming plenty of spousal income and max 401k on that end, and solo business other spouse with net profits just >$6500, then $6500 deposit could appropriately go either as employee deposit in SEP IRA acct, or as a new TIRA, and later consolidate. I think that's what you said. That is how I understand it as well.

'Add a fact' always changes the scenario bit :happy

I agree it is cleaner in the TIRA. Thank you so much for your time and input.

Best regards.
OK, with the added information of plenty of spousal income and 401k, that introduces the possibility that your Traditional IRA contributions may be non-deductible especially if combined income is high (say over 180K). If that's the case, you may not want to make any Traditional IRA contributions at all. Adding non-deductible contributions (IRA basis) to an otherwise purely pre-tax Traditional-IRA, SEP-IRA asset base will complicate future withdrawals and conversions. In this case, it may be better to contribute 20% of $6500 as employer contribution to SEP-IRA (guaranteed to be tax deductible) and then invest in taxable accounts.

See tables 1-2 and 1-3 in IRS Pub 590, How much can I deduct? Limit if covered by an employer plan:
http://www.irs.gov/publications/p590/ch ... 1000230467
If you're covered by an employer plan, full deduction allowed if MAGI < 95K. No TIRA tax deduction is allowed if MAGI exceeds 115K.
If you're not covered by spouse is covered, full deduction allowed if MAGI < 178K. No deduction allowed if MAGI exceeds 188K.
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Topic Author
countdown
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Re: SEP help please!

Post by countdown »

Thank you again DS. I think I've got it:
If combined income is higher, ($180 ish) , renders TIRA inapplicable, non-deductible.
Could create issue of contaminating existing pretax accounts with non-qualified TIRA deposit.

Although seems very little tax advantage to a SEP employer contribution based on a percentage of such nominal profit, likely safest approach, if do any contributions.

I will read the publications you link. Much thanks.
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