Sep-ira

[Questionguy101]

Taxpayer has a 25% SEP IRA contribution plan.

His 2010 self-employment income is $20,000. So the maximum SEP-IRA contribution is $4,704.

If the taxpayer has already contributed $5,000 to his traditional IRA, does it mean he cannot make any more contribution to his SEP-IRA?

[Roland Slugg]

If I'm not mistaken, his SEP contribution limit is $4,000. Where did you come up with $4,704?

His traditional IRA contribution may be limited in the same way that any other person's IRA deduction is limited if he is covered by another retirement plan, including a SEP. If his IRA contribution is reduced or eliminated by the phase-out rules, he can still make it, but it will be a non-deductible contribution. If that happens, a Roth IRA would be a better option ... if he qualifies for a Roth IRA and isn't denied one because his income exceeds THAT limit.

[Questionguy101]

If I'm not mistaken, his SEP contribution limit is $4,000. Where did you come up with $4,704?

His traditional IRA contribution may be limited in the same way that any other person's IRA deduction is limited if he is covered by another retirement plan, including a SEP. If his IRA contribution is reduced or eliminated by the phase-out rules, he can still make it, but it will be a non-deductible contribution. If that happens, a Roth IRA would be a better option ... if he qualifies for a Roth IRA and isn't denied one because his income exceeds THAT limit.

How did you come up with $4,000?

I used a 25% contribution plan worksheet to do the calculation and the result is $4,704.

[Kram BergGold]

The correct answer

The maximum SEP on a self employed person's 20,000 net is $3,717. It is different when you are figuring for an employee. I confirmed this in my software.

[Burke]

I just did it in my head, and I get the same thing. $20,000 X .9235 X .153 divided by 2 and then subtracted from $20,000 X .20% = $3,718.