SEP Contributions from savings

[Possi]

I have an S Corp. I am the only employee so far, and don't expect to have employees for a couple of years. (As long as my daughter isn't paying for her own security system...)

I just received a divorce settlement and have a question about my SEP IRA.

I would like to be able to offset my income at the end of the year by making a contribution to my SEP plan.

Am I allowed to make deductible contributions using my invested settlement money each year? My goal is to move as much as possible into my retirement, and save tax dollars each year while doing that. I believe I am allowed to do that, but the proforma tax return I created isn't allowing the deduction. I know, I know... I depend too much on the computer!

OR, must I make contributions throughout the year with and the Corporation matches it?

This might be a stupid question, and if it is, don't tell me... just be sweet...



Thanks,
Possi

[equinecpa]

Do you pay yourself a wage via your S corporation? Your SEP contribution limit will be based on your annual wage. You can fund your SEP throughout the year.

As far as funding through existing investments-you can't simply move stock from a non-retirement account to a retirement account. You'd have to sell it and then reinvest so that any unrealized gains (or losses) would be triggered.

Carolyn

[Possi]

Wages

I pay myself a wage, yes. My wages are about 50% of my income.

I know I would need to sell and then move the money. I'm thinking that I will keep about half of the settlement liquid, or at least accessible, for investing in retirement accounts. I need to find out how best to do that over time.

I think my program, is having an issue with my claiming to be self employed and getting a wage. It isn't allowing much of a deduction. Of course I am just playing around with the tax return. It must be be limiting it to my wages, which are not much.

[JohnH]

The SEP based on S-corp wages must be paid by your corporation and deducted on the 1120S, not on your personal return. The effect of the SEP contribution is automatically reflected on your personal return by virtue of the fact that the net S-corp income on your K-1 has already been reduced by the SEP contribution.

The only SEP contribution that would appear on your personal return would be a SEP contribution based on Schedule C earnings.

[Possi]

SEP setup

This particular SEP was set up when I was still a sole prop. I set it up and never added to it.

Should the Corp set up a new SEP? And you are saying that I cannot fund it with my own money (from the settlement).

Are there any other creative ways for me to gradually move this money to retirement and get the max benefits of being self employed?

Always learning,
~possi

[Uncle Sam]

SEP Contribution

A SEP-IRA contribution is STRICTLY an EMPLOYER'S contribution.
It has nothing to do with any deferral on the part of the employee. What you deferred years ago as a self-employed person is irrelevant now.
The corporation needs to set up SEP plan and make contributions to it pursuant to the SEP rules of maximum contribution based on an employee's salary.
As has previously been stated, the contribution for the S Corp reduces the taxable income, that gets reported on the K-1 form.

[equinecpa]

If you want to use money you have personally -lend it to the corporation as a shareholders loan, and then the corporation can make the SEP contribution.

[JoshinNC]

Unless you're makin' a lot of jack

a SIMPLE is most likely going to allow you to put more money away each year. Then you can just defer your current payroll and sell some of the settlement received assets each year to defray the reduction in your take home (if needed).

You should probally also max out your ROTH each year since the contributions would still be "liquid" enough to get back out in an emergency but would grow tax free (not just deferred) with no RMD worries down the road.

[erchess]

Roth

I am not old enough to be drawing it but originally Social Security was going to be tax free for everyone. Gradually they went back on their word and now I believe the majority of people pay tax on their Social Security Income.

I therefore do not recommend a Roth to anyone who cannot still max out their tax deferred plan. I think by the time I am old enough to want to retire (15 or more years) Roth withdrawals will be taxable in most cases.

[Possi]

SIMPLE plan?

a SIMPLE is most likely going to allow you to put more money away each year. Then you can just defer your current payroll and sell some of the settlement received assets each year to defray the reduction in your take home (if needed).

You should probally also max out your ROTH each year since the contributions would still be "liquid" enough to get back out in an emergency but would grow tax free (not just deferred) with no RMD worries down the road.

So, the SEP plan needs to be the corporation's plan, and an expense to the corporation. I understand that. It will not help me move the settlement money easily, I mean without lending the corp money, etc. The money must come from the corporation, and that will weave a web that I don't want to follow.

I am really a simple woman running a simple business...

With the SIMPLE plan, I can decide at the end of the year, how much to put in the plan and get the deduction. It won't matter WHERE the money comes from. Same thing with the ROTH contribution. It won't matter WHERE the money comes from.

Do I have that right, Josh? (Not the part about me being a simple woman... the other part...)