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Author: mwyattea Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: SEP IRA AND 401K Date: 5/11/2001 12:10 PM
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I'm coming at this from a little different perspective. I'm an Enrolled Actuary, primarily involved in setting up and running qualified pension plans, both defined benefit (my main focus) and also defined contribution plans. A SEP and a profit sharing plan for a "one man" operation are pretty much the same, but both fall under the limitation of 15% of Eligible Compensation. BTW, since you are a sole proprietor (Sch C Income), you must understand that Compensation in your case is referred to as Net Earned Income. What this means is you have your Schedule C Income, you subtract your contribution, and what you have left is Net Earned Income. The test is your contribution can't exceed 15% of Net Earned Income (the algebra converting the 15% to percentage of Schedule C Income gets you to the 13.04%).

What I was hinting at was establishing a Money Purchase plan (qualified plan). This would entail establishing a legal document and annual 5500EZ filings. However, since you would be starting out, the 5500EZ filings would not trigger until your total qualified plan assets exceeded $100,000. In addition, you could probably score a "safe harbor" prototype document from your brokerage; hence your administrative costs over a SEP would most likely be minimal. In any event, the pension bill currently being considered would make these changes in the 2002 plan year.

I'm assuming that your regular income from your job at your employer puts you at a decent marginal rate on your additional Schedule C Income. Therefore, an increase in the amount you could deduct from your Schedule C income could be viewed as coming at your highest marginal rate. Keep your eyes open on this legislation as in the future it could well allow you to defer much more from Sch C than currently possible.
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