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Author: 4aapl Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: IRA, Roth IRA, and SEP Date: 1/15/2014 5:00 PM
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This year is my first partial year as an independent contractor, and my wife restarted as one too. After some of the expenses, let's say I made $40k, my wife made $1k, and we had $75k in dividends, and a $3k allowable cap gains loss. Our AGI after a couple expenses (line 27 and 29 for SS and Health Insurance) should be in the $100-$110k range (good to be under $110k, since we'd like to stay below the child tax credit limit levels). We did not have access to add money to any 401ks this year.

What is allowable for a combination of an IRA, Roth IRA, and SEP? My first priority would be to fully fund the Roths, since it was a partial year of work and we had capital losses instead of gains. Plus after last year, anything I can put into an account that I then don't have to report is well worth the lower complexity.

If I can put $5k in both of those, am I still able to put money into either of the other venues? I haven't checked recently, but I thought there were limits on the IRA due to the Roth contribution, but could put up to ~20% of our separate paychecks into SEPs.

Thanks!
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119857 of 121061
Subject: Re: IRA, Roth IRA, and SEP Date: 1/15/2014 5:41 PM
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What is allowable for a combination of an IRA, Roth IRA, and SEP?

Assuming you're both under 50, $5,500 each for traditional/Roth IRA. (Total contribution between the two types for each of you cannot exceed $5,500.) For SEP, figured separately for each of you, it's 20% of (the bottom line of Schedule C minus line 6 or 13 of Schedule SE). There are SEP dollar limits also, but you won't come anywhere near them.

Phil
Rule Your Retirement Home Fool

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Author: 4aapl Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119859 of 121061
Subject: Re: IRA, Roth IRA, and SEP Date: 1/15/2014 5:51 PM
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What is allowable for a combination of an IRA, Roth IRA, and SEP?

Assuming you're both under 50, $5,500 each for traditional/Roth IRA. (Total contribution between the two types for each of you cannot exceed $5,500.) For SEP, figured separately for each of you, it's 20% of (the bottom line of Schedule C minus line 6 or 13 of Schedule SE). There are SEP dollar limits also, but you won't come anywhere near them.

Phil
Rule Your Retirement Home Fool


So we could each do $5.5k for our Roth's (11k total)

In addition, for our SEPs I could add $8k ($40k * 20%) and my wife could add $200 ($1k * 20%).

Thanks for your help!

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119860 of 121061
Subject: Re: IRA, Roth IRA, and SEP Date: 1/15/2014 5:59 PM
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In addition, for our SEPs I could add $8k ($40k * 20%) and my wife could add $200 ($1k * 20%).

A caution here. I know you're dealing in round numbers here, but if your Schedule C bottom line is a $40,000 net profit, you cannot make an $8,000 SEP contribution. You must reduce the $40,000 by your deduction for 1/2 of the SE tax before applying the 20%.

Phil
Rule Your Retirement Home Fool

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Author: 4aapl Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119861 of 121061
Subject: Re: IRA, Roth IRA, and SEP Date: 1/15/2014 6:03 PM
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In addition, for our SEPs I could add $8k ($40k * 20%) and my wife could add $200 ($1k * 20%).

A caution here. I know you're dealing in round numbers here, but if your Schedule C bottom line is a $40,000 net profit, you cannot make an $8,000 SEP contribution. You must reduce the $40,000 by your deduction for 1/2 of the SE tax before applying the 20%.

Phil
Rule Your Retirement Home Fool


Ok, thanks. I had remembered (incorrectly it appears) that the number was 25% before exclusions, and that it had generally worked out to 20% overall.

Either way, it puts estimates in the right ballpark, which is a good start.

Thanks

Aaron

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119862 of 121061
Subject: Re: IRA, Roth IRA, and SEP Date: 1/15/2014 6:07 PM
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I had remembered (incorrectly it appears) that the number was 25% before exclusions, and that it had generally worked out to 20% overall.

You remembered partially correctly. It does start at 25%, but adjusting for the effect of the SEP contribution gets you down to 20%. Then you still have to adjust for the SE tax deduction.

Peter explains it much better than I. I take the easy way out and phrase it the way I originally did, with a soupcon of "trust me, would I lie?"

Phil
Rule Your Retirement Home Fool

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119863 of 121061
Subject: Re: IRA, Roth IRA, and SEP Date: 1/15/2014 6:09 PM
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Peter explains it much better than I.

Is that the part where I equate algebra with magic?

--Peter

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Author: 4aapl Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119865 of 121061
Subject: Re: IRA, Roth IRA, and SEP Date: 1/15/2014 6:27 PM
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On a related note, is there an advantage/difference between an IRA or SEP, or are they functionally equivalent but just have different limits? Do either of them avoid the self employment tax, or the individual side of social security?

And with a ROTH/IRA you have up until tax day to make your contribution for the proceeding tax year. Is a SEP the same in that respect?

Sorry, I'm new to SEPs and the self employment tax in general, though truthfully I also can't remember if a standard 401k deduction avoids any of the various payroll taxes other than federal income.

Thanks

Aaron

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119867 of 121061
Subject: Re: IRA, Roth IRA, and SEP Date: 1/15/2014 8:21 PM
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On a related note, is there an advantage/difference between an IRA or SEP, or are they functionally equivalent but just have different limits?

A SEP is a way of getting money into a traditional IRA. Once it's there it behaves just like any other traditional IRA money.

Do either of them avoid the self employment tax, or the individual side of social security?

No

And with a ROTH/IRA you have up until tax day to make your contribution for the proceeding tax year. Is a SEP the same in that respect?

SEP contributions can be made up until the extended due date (October 15).

Sorry, I'm new to SEPs and the self employment tax in general, though truthfully I also can't remember if a standard 401k deduction avoids any of the various payroll taxes other than federal income.

It doesn't. Retirement plans available to the self-employed are covered in IRS Publication 560.

Phil
Rule Your Retirement Home Fool

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