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I've dug through this board and several of the IRS publications and I would truly appreciate it if someone better informed than myself could read through my assumptions and make sure I'm not making huge mistakes.

I will not reach $87,900 in total income this year.

I am a full-time employee and have wages reported on a W-2 at the end of the year. I make 403b (deductible) and Roth IRA (non-deductible) contributions out of this income. I always reach the federal maximum on both. The 403b contribution is an above the line deduction to my AGI and reduces my income tax liability.

This year (2005) I will also have some independent contractor income reported via 1099s.

I am eligible for a SEP-IRA based on my 1099 reported income in addition to funding a 403b and Roth IRA to the federal maximum with my W-2 income. The SEP-IRA limits are not affected by my 403b or Roth IRA. For the SEP-IRA I am eligible to contribute 20% of my net income or $41,000 whichever is less as I am a sole proprietor based on the convoluted SEP-IRA worksheet in publication 560. Could someone please explain this to me? I've read through that section several times and it's still clear as mud how I can figure out the maximum I can contribute.

SEP-IRA contributions will not reduce net income reported via Schedule C but instead are taken as an above the line deduction on the 1040 form reducing adjusted gross income. As such SEP-IRA contributions will not affect the amount of SE tax I will have to pay as calculated via Schedule SE (which is based off Schedule C). Therefore opening a SEP-IRA does not save on SE tax but does save on the federal income tax I have to pay. This allows me to keep a bit more of my money although I cannot readily access that money until I am 59 1/2.

Business expenses (milage, tolls, etc.) will reduce my net income and reduce SE tax. Half of the SE tax I pay will be used to reduce my AGI as an above the line deduction to AGI on the 1040 form.

So based on this if I want the largest amount of readily spendable cash on hand I should not open a SEP-IRA. If I want to keep as much of what I earned as possible and don't mind not being to use it immediately I should open a SEP-IRA.
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