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Subject:  Re: ROTH IRA vs. SEP vs. DEDUCTIBLE IRA Date:  1/24/1999  12:52 PM
Author:  TMFPixy Number:  8066 of 103813

Greetings, Angchu, and welcome. You asked:

<<I have a few questions regarding ROTH IRAs, profit sharing, SEPs, and 401(k)s that have been bothering me for a while.

1) This is for a friend who's in his early 30's and won't be retiring anytime real soon. If you are eligible to contribute to a SEP, a deductible IRA and a ROTH IRA, which would you contribute to first and why? He's trying to figure out how to maximize his contributions because he can't afford to contribute to them all.>>

That's really something for your friend to decide based on his desires, his investment choices, his self-employed income, and his tax situation today and in the future. As a self-employed person, he may contribute up to the lesser of 15% of his net self-employed income or $30K to a SEP. That contribution would be excluded from his current income for tax purposes, so it and all earnings would grow tax-deferred until he begins withdrawals in retirement. He then would be required to pay taxes on all distributions at the rates in effect at that time. With a deductible IRA, he may defer up to $2K of income per year. On withdrawal from the IRA, everything would be taxed at the rates in effect at that time. With a Roth, he may contribute up to $2K per year, but he gets no current tax deduction for that deposit. Instead, all earnings grow tax-deferred and in retirement he may take everything without paying a single penny in tax. If your friend can afford to contribute to the SEP as well as an IRA, though, then IMHO the Roth IRA gets the nod. That's because the deductibility of a traditional IRA contribution will be limited because of his SEP participation. Therefore, if one can't defer IRA contributions, the one that ultimately won't be taxed at all gets my nod.

<<2) Is there a maximum that can be contributed towards a Roth IRA, SEP and 401(k) combined? Does that matter whether it's an employer or employee contribution?

For example, can I personally contribute $2K towards my Roth, max my 401k to $10k (no employer match) and still have another employer contribute to my SEP (no employee match)? Any recommendations as to which I do first?>>

You may contribute the lesser of 25% of your compensation or $10K to a 401k. If your employer matches your contribution, then the percentage limit is reduced. For example, if your employer will match your contributions up to 3% of your pay, then your percentage limit drops to 22%. Only the compensation from that employer is considered for your percentage limit. It does not affect your ability to use a Roth IRA, so you may contribute up to $2K per year to that, too, provided you remain in the Adjusted Gross Income limits to do so ($95K for single filers, $150K for joint). Finally, your participation in the 401k and the Roth IRA will not affect another employer's contributions to a SEP for compensation you receive from that employer. In short, you may participate in all three vehicles subject to the limits previously specified.


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