Spousal Sep Ira

[taxxcpa]

A client qualifies for $ 15,000 SEP IRA based on a net profit of $ 75,000. If he wants to contribute an additional $ 5000 to a spousal IRA for his wife, is her IRA also to be considered a SEP IRA--or would it be a traditional IRA? Would it be unallowable unless he reduced his own IRA contribution so that the combined total was limited to 20% of his net profit?

I entered it in my software (DRAKE) as a $ 15000 SEP for him and for a traditional IRA for $ 5000 and got an error message.
Then I re-entered her contribution as a SEP IRA of $ 5000 and got no error message so that the two totaled $ 20000.

That implies that the spousal IRA would also be a SEP, but I can't find anything specific on the subject. It also implies that the total including spousal can exceed the maximum SEP allowed for the business owner alone.

Can anyone clarify the limitations on SEP IRAs including spousal IRAs?

[Bees Knees]

This is why you do not use software to learn tax law.


TTB, page 13-15:

A SEP is a written employer plan that allows the employer to
make deductible contributions into an individual retirement arrangement
on behalf of the employee (SEP-IRA). For this purpose,
a self-employed individual can contribute to his or her own
SEP.

No where does it say the employer can contribute to the spouse of an employee. The SEP is just like any other employer retirement plan. Only employees of the business (or self-employed individuals) can participate.

Your only alternative is to make a spousal IRA contribution to a traditional or Roth IRA for the spouse, assuming the other spousal IRA rules are met.

Traditional and Roth IRA contributions (including spousal IRA contributions) are not limited to a percentage of compensation. A person could contribute up to 100% of earnings to an IRA.

TTB, page 13-9 gives an example:

Example #2: Assume same facts as Example #1, except
that Barry’s taxable compensation is only $6,000. Barry
contributes $5,000 to his IRA. Jill’s IRA contribution is
limited to $1,000.

Note that in this example, total compensation between the two spouses was $6,000, and total contributions between the two IRAs was $6,000, or 100% of total compensation. Thus, in your case, maxing out the SEP IRA contribution for the husband to 20% of self-employed earnings leaves additional compensation that can qualify for a spousal IRA contribution.

[taxxcpa]

Spousal IRA

This is why you do not use software to learn tax law.


TTB, page 13-15:



No where does it say the employer can contribute to the spouse of an employee. The SEP is just like any other employer retirement plan. Only employees of the business (or self-employed individuals) can participate.

Your only alternative is to make a spousal IRA contribution to a traditional or Roth IRA for the spouse, assuming the other spousal IRA rules are met.

I agree with the above, but my main concern is whether she can contribute anything at all.
If his maximum allowable amount is $ 15,000 and she has no income, can she then contribute $ 5000 to a traditional IRA? Thus the combined contributions would exceed the amount allowable based on his earnings and his SEP contribution.

As you indicate, the tax program isn't the ultimate authority which is the reason I'm asking on this forum.

[Bees Knees]

I agree with the above, but my main concern is whether she can contribute anything at all.
If his maximum allowable amount is $ 15,000 and she has no income, can she then contribute $ 5000 to a traditional IRA? Thus the combined contributions would exceed the amount allowable based on his earnings and his SEP contribution.

Sorry, I edited my previous post to answer this question after you asked it again.

IRAs are limited to 100% of compensation. Thus, if you max out the SEP contribution to 20% of compensation, that leaves 80% of the compensation available to fund an IRA, assuming all other IRA contribution rules are met.

[taxxcpa]

Pub 590 does not make this very clear:
2.

The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts.
1.

Your spouse's IRA contribution for the year to a traditional IRA.
2.

Any contributions for the year to a Roth IRA on behalf of your spouse.

This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $10,000 ($11,000 if only one of you is age 50 or older or $12,000 if both of you are age 50 or older).

If the $ 12,000 over-all limit does not apply if the excess is allowable by it being a SEP IRA, then it would be OK to take another $ 5000.

The tax program gives an error message if I add the $ 5000 for her.. However I set it up to e-file and the program said it COULD be e-filed. Of course, I've had other ones that the program said could be e-filed, yet they were rejected for something the program didn't catch.

[Bees Knees]

If the $ 12,000 over-all limit does not apply if the excess is allowable by it being a SEP IRA, then it would be OK to take another $ 5000.

Keep in mind that a SEP is not treated as an IRA until the money is in the SEP IRA. Thus, you have to think of a SEP as a qualified employer plan for purposes of making contributions, but then think of it as an IRA once the contributions are in the SEP (for distribution rules, vesting rules, etc.)

[taxxcpa]

Spousal contribution

"then think of it as an IRA once the contributions are in the SEP (for distribution rules, vesting rules, etc.)"
So it is OK to add another $ 5000 for her once he makes the maximum contribution.

[Bees Knees]

Yes, she can contriubte $5,000 to an IRA, even if he maxes out his SEP.

[Burke]

I can't figure out why your program is showing an error for the spouse, unless it is being keyed in some place that it assumes you are trying to put it in the SEP. Or that the husband is making the contribution somehow. It would go into a separate IRA account for her alone and would be entered as though SHE made the contribution. You did not mention in your OP whether the spouse worked and/or had a retirement plan of her own. If that is the case, do income limitations apply?

[taxxcpa]

Ira

Yes, she can contriubte $5,000 to an IRA, even if he maxes out his SEP.

Thanks. In fairness to my tax program, I should point out that it has both :"notes" and "error messages," and the indication that it was not allowed as a traditional IRA was in 'notes' rather than as an 'error.'

After all my questions, he may now decide not to take the spousal IRA, but he did ask about it.

[taxxcpa]

Program note

I can't figure out why your program is showing an error for the spouse, unless it is being keyed in some place that it assumes you are trying to put it in the SEP. Or that the husband is making the contribution somehow. It would go into a separate IRA account for her alone and would be entered as though SHE made the contribution. You did not mention in your OP whether the spouse worked and/or had a retirement plan of her own. If that is the case, do income limitations apply?

The funny thing was that it showed no error if I entered it as a SEP IRA for her even though she has no income whatsoever. It also allowed him the full 20% without subtracting half the SE tax--however, when I entered the percentage as 25% on another screen, it calculated it correctly at 20% minus half the SE tax.

Also, the program called it a :"note" , not an error message--I used the wrong term.
The program also allows it to be e-filed with the traditional IRA of $ 5000 plus allowing his SEP.