sep IRA and Triditional IRA

[ljwalters]

I’m not that familiar with Sep IRA’s. Client, self employed with no employees, and never will have employees, opened a Sep Ira. The way I read she can deposit up to 20% of her net earning less the ½ social security tax deducted on the 1040. She is 65 and wants to contribute the maximum to a tradition IRA also. Is the allowed and am I right on the 20% max for the SEP.

Thanks Linda and Buddy

[Cat in OH]

I’m not that familiar with Sep IRA’s. Client, self employed with no employees, and never will have employees, opened a Sep Ira. The way I read she can deposit up to 20% of her net earning less the ½ social security tax deducted on the 1040. She is 65 and wants to contribute the maximum to a tradition IRA also. Is the allowed and am I right on the 20% max for the SEP.

Thanks Linda and Buddy

Yes, she can contribute to both...I do every year! The only catch is that she has to have enough earned income to cover both. (ie if she only had $5000 earned income, she could not do both the SEP and the full IRA.) There's a worksheet to calculate the maximum contribution that she can make to the SEP. I would also have her consider contributing to a Roth IRA instead of the traditional, other things being equal.

Cathy

[Pacun]

Yes, she can contribute to both...I do every year! The only catch is that she has to have enough earned income to cover both. (ie if she only had $5000 earned income, she could not do both the SEP and the full IRA.) There's a worksheet to calculate the maximum contribution that she can make to the SEP. I would also have her consider contributing to a Roth IRA instead of the traditional, other things being equal.

Cathy

ANOTHER (sometimes ignored) catch is that you are considered "covered by a retirement plan at work". So be careful if your client makes a bunch of money. That's also true for you Cathy.

[Cat in OH]

ANOTHER (sometimes ignored) catch is that you are considered "covered by a retirement plan at work". So be careful if your client makes a bunch of money. That's also true for you Cathy.

Thanks for the reminder. As it is, my practice is so small (and I'm purposely shrinking it), that the retirement plan at work isn't a factor. Actually, my problem this year will be making enough to cover a SEP and IRA's for both my spouse and me!

Cathy

[Pacun]

I’m not that familiar with Sep IRA’s. Client, self employed with no employees, and never will have employees, opened a Sep Ira. The way I read she can deposit up to 20% of her net earning less the ½ social security tax deducted on the 1040. She is 65 and wants to contribute the maximum to a tradition IRA also. Is the allowed and am I right on the 20% max for the SEP.

Thanks Linda and Buddy

Cathy, I saw your answer. If someone makes only 5K, would that make more sense to do a Roth IRA?

Going back to the original question... 20% doesn't seem to be the percentage, I think it is something like 44% up to a maximum of $220K income.

[taxdan]

Cathy, I saw your answer. If someone makes only 5K, would that make more sense to do a Roth IRA?

Going back to the original question... 20% doesn't seem to be the percentage, I think it is something like 44% up to a maximum of $220K income.

Actually, I think Cathy was right with the 20% up to $45K.

[Cat in OH]

Actually, I think Cathy was right with the 20% up to $45K.

Actually, Linda had the 20% figure. Pub 560 has the details, but basically it says that the contribution for 2007 cannot exceed the lesser of 25% of the earnings or $45,000. For the business owner, this is adjusted for self-employment tax. There's a worksheet in the pub to calculate the amount that can be contributed. It pretty much works out to be 20%, so she was right on with both numbers.

My caution was to be sure that the total contributed to both the SEP and the IRA didn't equal more than her earned income if it was a small business.

Pacun-you're right about it making more sense to contribute to the Roth than the SEP if you have to choose. We just went through that this year. Hubby's retired so my practice is our only earned income. Till we maxed our Roths, we really couldn't put anything much into the SEP. Especially with mine, I'd rather have it earning tax free income!

Cathy