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Hers is the situation:

Inflation adjusted pension of $6000+ per month.

Self-employed with net income of $40,000 - $50,000 per year. Expect to work 3-5 more years.

Spouse does not work.

Existing IRA (Vanguard 2010) with balance of $100,000; existing SEP (individual stocks).

Have $200,000 of unexpected, tax-free inheritance.

Question: what are max amounts I can contribute to the IRA, SEP, spousal IRA, and /or (potentially) Roth IRA? Goal is to fund these accounts to the max over the next 3-5 years so that various investments will grow tax deferred.

I read about limits on each type of IRA, but am having trouble finding how limits apply when more than one type is being used.

Thanks in advance.
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Question: what are max amounts I can contribute to the IRA, SEP, spousal IRA, and /or (potentially) Roth IRA? Goal is to fund these accounts to the max over the next 3-5 years so that various investments will grow tax deferred.

Traditional IRA/Roth IRA for you: $5,000/$6,000 if 50 or older
Traditional IRA/Roth IRA for wife: $5,000/$6,000 if 50 or older
SEP for you: smaller of $45,000 or 25% of compensation

I read about limits on each type of IRA, but am having trouble finding how limits apply when more than one type is being used.

The limits for IRAs are for the total of your IRA contributions - Roth and traditional combined.

AJ
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Question: what are max amounts I can contribute to the IRA, SEP, spousal IRA, and /or (potentially) Roth IRA? Goal is to fund these accounts to the max over the next 3-5 years so that various investments will grow tax deferred.

Instead of the SEP consider a SIMPLE 401(k) for your self-employment. For the self-employed your SEP limit is 20% of your Schedule C bottom line minus the adjustment to income for 1/2 of self-employment tax. The SIMPLE limit is higher (up to 100% of compensation). Important point: you must have the SIMPLE established by October 1 of the plan year.

See IRS Publication 560.

Phil
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I keep seeing this conflict between 20% and 35% of net for the SEP. Does anyone know which is accurate?

Also, since I am over 59 1/2, I can withdraw from these plans (but have no plans to do so). I assume there is a minimum time money must be left in the plan before it can be withdrawn- correct? If this is correct, is there a "first in, first out" or similar calculation used for withdrawls?
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I keep seeing this conflict between 20% and 35% of net for the SEP. Does anyone know which is accurate?

I'll take the 35% above as a typo for 25%.

Both are correct, depending on your point of view. Technically, the correct answer is 25% of the net income from the schedule C business. But that net income must include deducting the amount of the SEP contribution itself. After subtracting the SEP contribution, 25% of the remaining income can be contributed to a SEP.

But you can use some algebra to short-cut things. If you do that, you end up with the SEP limitation as 20% of the business' net income BEFORE the SEP contribution.

If you are talking about a business that is not a sole proprietorship or partnership (IOW, a S or C corporation), then the limitation is 25% of wages.

Also, since I am over 59 1/2, I can withdraw from these plans (but have no plans to do so). I assume there is a minimum time money must be left in the plan before it can be withdrawn- correct?

Not correct. At least not correct in the tax laws. The investment you select for your IRA or SEP-IRA money may have some restrictions on withdrawals, but those are separate issues.

Practically, it makes no sense to contribute and then withdraw in the same year. One is a tax deduction, the other is taxable income. So they just offset each other. But if you want to make a contribution for your final year of working and then take some out in your first calendar year of retirement, that is just fine - and may actually reduce your taxes a bit.

I suppose there would be a bit of game to play here if you have some significant pre-tax money in an IRA. You would get a full deduction for the contribution, but not all of the withdrawal would be taxable. In that setting, using a solo 401k plan would be even better. Even if you don't need the increased contribution limits. SEP contributions still end up in an IRA and would need to be considered when calculating the non-taxable portion of IRA withdrawals. But a solo 401k plan is not an IRA. So you would not be diluting your pre-tax IRA money with new contributions. I'm not sure there's a real practical benefit to all of this, though. I'd have to think about that some more.

--Peter
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Technically, the correct answer is 25% of the net income from the schedule C business. But that net income must include deducting the amount of the SEP contribution itself. After subtracting the SEP contribution, 25% of the remaining income can be contributed to a SEP.

But you can use some algebra to short-cut things. If you do that, you end up with the SEP limitation as 20% of the business' net income BEFORE the SEP contribution.


Not quite. From the Schedule C bottom line you have to deduct the adjustment to income for 1/2 of SE tax. The 20% is then applied to the balance.

See Pub 560 and its handy Appendix which lays this all out.

Phil
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From the Schedule C bottom line you have to deduct the adjustment to income for 1/2 of SE tax. The 20% is then applied to the balance.

Agreed. I was only dealing with the difference between the 20% and 25% that you see mentioned for SEP contributions in various places. I was glossing over that bit of complexity for the moment.

--Peter
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You are correct on the typo!

Now I see things more clearly and appreciate the help. I'll probably get a small amount disallowed for 2007 as I did an amended return without performing the SE tax calculation. That's fine as I'll put the difference into 2008.

As to taking out funds, I was talking about future years and wondering if there was a waiting period. I'm glad to see there is not.

Thanks for the help. I did look at the IRS publication and will study it some more.
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