No. of Recommendations: 1
Dear BeenFooled (me too, plenty)

1. You can wait until you do your taxes and then determine how much you want to contribute. But you must contribute by 4/15.

2. It is better to contribute as you go along. Since you get the benefit of tax deferred gains earlier and dollar cost averaging.

3. To figure out what you can contribute is a bit hard to understand. It is 15% of your taxable income, but after you take out the 15% as one of your deductions. Only the government could figure out something like this. That's why we called the "tax recover act", the "accountants and tax preparers full employment act".

It works out to 13.04348 percent. You do it like this. Take all your deductions except for the SEP IRA to see what your AGI would be. Let's say it is $10,000 for round numbers. Now ask yourself the question, "What do I subtact from $10,000 so that what is subtacted is 15 percent of what's left over".

Clear as mud? Like I said, only gov could come up with this. It's in their blood.

In algebra it looks like this; X equals what's left over after you subtact your SEP contribution; AGI is what you have before you subtact your SEP;

so X = AGI - SEP

And the ratio of SEP to X is .15

SEP/X = .15

multiply both sides by X and you get SEP = .15X

Substitute .15X into the first equation for SEP and you get:

X = AGI - .15X

Add .15X to both sides and you get:

1.15X = AGI

or X = AGI/1.15

So if your amount before the SEP is 10,000, you divide it by 1.15 and you get 10,000/1.15, or 8,695.65.

So your SEP contribution is 10,000 - 8,695.65 = 1,304.35. To check this out we ask, "is our SEP contribution 15 percent of our AGI after the SEP was taken out?"

1,304.35/8,695.65 = .15 (check!)

This is why I pay an enrolled agent to do my taxes. I hope they didn't change the rules since the last time I went through this. But that is how it was explained to me.

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