SEP IRA and 401k (w2 and 1099) questions

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rotLobster
Posts: 13
Joined: Mon Oct 02, 2017 9:27 pm

SEP IRA and 401k (w2 and 1099) questions

Post by rotLobster » Wed Jan 10, 2018 6:13 pm

I am a full time employee with my primary company. My gross income (W2) for this company will be around 98,000 for 2017. The company has a 401k program which i max out each year including catchup (24,000). i am single with no dependents.

for 2017, i also made approximately 47,000 from contracting (1099). I am a software developer. i work from home and have little or no expenses associated with contracting. My contract work is not for my primary employer. Nor is my primary employer associated with my contract work in any way.

i have a number of taxable mutual fund accounts. In, addition, I have an IRA account that was a rollover from an earlier employer's 401k.

my questions are

1. can i contribute to a SEP IRA from the W2 income? and if so how much?
2. will that deduction reduce my adjusted gross income?

assuming i could reduce my adjusted gross income by putting 100% of the W2 income in a pre-tax (SEP) account, i would do so. My primary goal is to reduce my taxes for 2017. The money would go into Vanguard mutual funds.

thanks for any info.

10509835
Posts: 3
Joined: Mon Aug 01, 2016 8:26 am

Re: SEP IRA and 401k (w2 and 1099) questions

Post by 10509835 » Thu Jan 18, 2018 12:49 am

You could contribute to a sep, but it would be based I your 1099 income.

krow36
Posts: 1849
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: SEP IRA and 401k (w2 and 1099) questions

Post by krow36 » Thu Jan 18, 2018 1:56 am

Check out Spirit Rider's 1st post in this thread: viewtopic.php?f=1&t=214308
You can still start a SEP for 2017's 1099 income. The SEP and your rollover IRA will interfere with a backdoor Roth unless you can roll them into your 401k before Dec 31. For 2018's and future years' 1099 income, you should start a solo 401k which doesn't interfere with the backdoor Roth.

Spirit Rider
Posts: 8683
Joined: Fri Mar 02, 2007 2:39 pm

Re: SEP IRA and 401k (w2 and 1099) questions

Post by Spirit Rider » Thu Jan 18, 2018 3:20 pm

Both 10509835 and krow36 are correct.

You can only contribute 20% of your net self-employment earnings to a SEP IRA. Your net self-employment earnings = business profit - 1/2 SE tax. Business profit = 1099 income - legitimate business expenses.

If you manually file your returns. Complete Schedule C Profit or Loss From Business, Schedule SE Self-Employment Tax and Publication 560 Retirement Plans for Small Business, Chapter 5. Table and Worksheets for the Self-Employed, page 22, Deduction Worksheet for Self-Employed. Or use your tax software to complete these and properly calculate your maximum SEP IRA contribution.

Do not use the contribution calculators you will generally find on the web. They will not correctly calculate your maximum contribution due to your circumstances. There are two calculators I am aware of that will give a correct answer in your circumstances. It just so happens that they are from two of own. The simpler calculator for your circumstances is from the Oblivious Investor (AKA ObliviousInvestor) and the more flexible and complex spreadsheet is from the Finance Buff (AKA tfb)

rotLobster
Posts: 13
Joined: Mon Oct 02, 2017 9:27 pm

Re: SEP IRA and 401k (w2 and 1099) questions

Post by rotLobster » Tue Jan 30, 2018 11:48 am

thanks for the replies.

after reviewing the replies, i then searched for anything at the IRS that would define 'How Much Salary Can You Defer if You’re Eligible for More than One Retirement Plan?' and hit this page:

https://www.irs.gov/retirement-plans/re ... lish-a-sep

which states:

The amount of salary deferrals you can contribute to retirement plans is your individual limit each calendar year no matter how many plans you're in. This limit must be aggregated for these plan types:

401(k)
403(b)
SIMPLE plans (SIMPLE IRA and SIMPLE 401(k) plans)
SARSEP


and further

Elective deferral limit

The amount you can defer (including pre-tax and Roth contributions) to all your plans (not including 457(b) plans) is $18,500 in 2018 ($18,000 in 2015 - 2017). Although a plan's terms may place lower limits on contributions, the total amount allowed under the tax law doesn’t depend on how many plans you belong to or who sponsors those plans.


the key words here 'the total amount allowed under the tax law doesn’t depend on how many plans you belong to or who sponsors those plans.'

much of what i found in my searches outside of the IRS indicate that i can have two plans, my 401k and for my 1099, a SEP IRA. i was able to do the calculations based on my 1099 using a circular bit of math (involves deducting some part of the self employment tax) from the IRS website. so i have some idea of the amount i can deduct assuming the limit is more than 18,000. my issue is i want to verify the actual limits based on IRS references for tax year 2017 and so far that search has not been successful.

what am i missing here in my search at the IRS for a answer to this question? can someone point me in the right direction, or am i misreading the information on the IRS website?

thanks for any replies

rotLobster
Posts: 13
Joined: Mon Oct 02, 2017 9:27 pm

Re: SEP IRA and 401k (w2 and 1099) questions

Post by rotLobster » Tue Jan 30, 2018 1:00 pm

apparently i cant edit a prior post. i was going to add...

for a sep ira for the 1099, is the nuance that i am the 'employer' and the amount i put in is not considered a 'salary deferral' by an employee, but rather a contribution by the employer?

Spirit Rider
Posts: 8683
Joined: Fri Mar 02, 2007 2:39 pm

Re: SEP IRA and 401k (w2 and 1099) questions

Post by Spirit Rider » Tue Jan 30, 2018 1:01 pm

You are making this more difficult that it needs to be. There is a maximum SEP IRA contribution calculation. Then there are two types of well known and well established limits that apply.

You can only make an employeR contribution up to 20% of your net self-employment earnings to a SEP IRA. Your net self-employment earnings = business profit - 1/2 SE tax. Business profit = 1099 income - legitimate business expenses.

There is a 402(g) employee deferral limit/employeE across all qualified plans. 2017 = $18,000 and 2018 = $18,500. This does not apply to a SEP IRA's employeR contributions.

There is a 415(c) annual addition limit/unafilliated employeR. Annual additions are the sum of all employeE + employeR contributions. 2017 = $54,000 and 2018 = $55,000.

The bottom line is that you can make your maximum calculated (< $9K) SEP IRA employer contribution. As I pointed out in a previous post, do not use online contribution calculators except for the two I mentioned. The others will calculate your SE tax incorrectly and thus your maximum SEP IRA incorrectly. Your safest option is to use tax preparation software.

Spirit Rider
Posts: 8683
Joined: Fri Mar 02, 2007 2:39 pm

Re: SEP IRA and 401k (w2 and 1099) questions

Post by Spirit Rider » Tue Jan 30, 2018 1:02 pm

rotLobster wrote:
Tue Jan 30, 2018 1:00 pm
apparently i cant edit a prior post. i was going to add...
Just click on the little pencil icon.

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