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January 11 - $1000 deposited in Traditional IRA
February 15 - started a sole proprietorship
March 19 - SEP opened
March 19 - $1111 ($1000 plus earnings) transferred in from Traditional to SEP
April - $2.00 dividend transferred from Traditional to SEP
(Traditional is now zeroed out.)

If I understand your facts, your advisors are all full of beans. Let me restate the facts as I understand them. (A misunderstanding of the facts could well lead to wrong answers.)

I assume that all dates are in 2002 and IRA transactions are for tax year 2002. I'm also going to assume that you have at least $1,000 in taxable compensation for 2002.

So far all you've done is made a $1,000 traditional IRA contribution for 2002. You can make $2,000 more ($2,500 if you're 50) in traditional IRA contributions for 2002 plus 13.something percent of your net income from self-employment as a SEP contribution, as long as you have the taxable compensation to support the contributions.

You mentioned Roths in a way that leaves me less than convinced that you fully understand them. Your combined total of traditional and Roth IRA contributions for tax year 2002 cannot exceed the aforementioned $3,000 ($3,500). SEP coverage doesn't affect your ability to contribute to Roth and traditional IRAs, but it does make deductibility of traditional IRA contributions subject to the AGI phaseouts.

I have no idea why you opened a separate SEP account. I just make my SEP contributions to my existing traditional IRA.

I suggest some reading in IRS Publications 560 and 590 and the FAQ's, with a followup if something doesn't make sense.

Phil Marti
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