Confused on IRA

[S T]

Okay now I am confused due to a client email received

Normally we have this client on a SEP-IRA - now he is talking about a ROTH SEP-IRA - Is there a Roth SEP-IRA- I didn't think so,

Roth IRA he could fund by 4/15/11 (for 2010) and then also still fund a SEP-IRA - or he could "rollover" funds from a traditional IRA or a SEP_IRA to a "Roth" and pay the associated taxes.

Is this client confused or is he just confusing me??

Thanks,

Sandy

[dsi]

A Simplified Employee Pension (SEP-IRA) is a traditional IRA set up by an employer for a firm's employees. An employer may contribute up to $30,000 or 15% of an employee's compensation annually to each employee's IRA.

You need to ask your client for some paperwork!

[S T]

No paperwork yet

This post was an inquiry and as a self-employed, can they not contribute up to 25% of net earnings (20% adjusted for SE Tax) - I realize what a SEP-IRA is - I believe the client doesn't realize what it is and is confusing the issue with a ROTH IRA

Client believes that there is a "ROTH SEP-IRA" that is my question - I did not think there was a ROTH SEP-IRA??

Client would either Fund a ROTH IRA and a SEP-IRA (timing deadlines of course)
or - a SEP-IRA for the tax year 2010 - Correct?? So say for 2010 he could fund the maximum SEP-IRA amount of $5,200 into a SEP-IRA (timely with Extension) and then also fund a maximum ROTH IRA amount of $ 5,000 (if done by 4/15 due date of return - or he could simply choose to fund only a ROTH IRA for $ 5,000 (if it had been made by the 4/15 due date of the return

If the client chose to he could roll over a established SEP-IRA or Traditional IRA to a "ROTH IRA" and then choose to pay the associated taxes in the year of rollover.

Somehow this client has now become fixated on ROTH IRA's.

What I really need to understand and be clear on is that there is "NO SUCH" Roth Sep-IRA category?

Thanks,

Sandy

[appelman]

I do believe...

That is correct. There is no such thing as a Roth-SEP. But you might want to look at the following:

http://money.cnn.com/2008/11/28/smallbusiness/roth_return.fsb/index.htm

[Bees Knees]

From TTB, page 13-13:

Neither a SEP-IRA nor a SIMPLE IRA can be set up as a Roth
IRA.

[Lion]

401(k)

He's probably heard about the Roth option for 401(k)s being talked about as a Roth option for small business retirement plans. I agree that my research has shown no Roth-SEP-IRA beast. And, I have a SEP myself, so do research it from time to time to keep up on the ever-moving targets of taxes.

[JohnH]

Evan's article was a good suggestion about what the client may be thinking. I did a Roth conversion last year on part of my SEP because it looked like a good move for me, so I had to think this through. If he's incorporated, the client might be able to do the same thing if the numbers work for him otherwise. This is so because the SEP contribution through a corp is not subject to FICA/Med tax.

He can set up the SEP, thus bypassing FICA/Med tax on the SEP contribution. Then he does a Roth conversion with the money in the SEP. He could do the conversion immediately or anytime within the year. After all the dust settles, the 15% he and the corporation saved (reduced to 13% this year) would help offset the income tax due on the Roth conversion.

Assuming 1) he has a long time frame; 2) the Roth IRA gains in value, and 3) Congress doesn't figure out a back-door method for taxing the Roth, he might come out very well in future years. None of this works if he has other employees for whom he must also make SEP contributions, but if he's the only employee, the decision to put money into the SEP is almost a no-brainer. Then the next step is to figure out whether the Roth conversion makes sense. I'd be inclined to do it even if the marginal tax rate is 28% and how deep he is into the 28% bracket, but at that level it's more of a risk.

[S T]

Roth

Thanks Everyone! I didn't believe their was a Roth SEP IRA- but then when a client starts to "talk" I like to be able to point in the right direction. before correcting the iniformation or mis-information being conveyed.

Sandy

[oceanlovin'ea]

Sounds like something my mother would say. She is 90 years old and is still working. She has an s corp and she contributes to a SEP-IRA every year. She kept talking about her ROTH a few years ago and I kept saying it wasn't a ROTH it was a SEP. Well, I was wrong.

She has a ROTH IRA that was set up for 60 months and it comes due next year. When she went to the bank (a well known national bank who now has a new name) they convinced her to put her money in a ROTH IRA. SHE WAS 86 YEARS OLD!!!! What good was a ROTH gong to do her?

Every time we talk about her IRA, she gets confused. We now do not ever mention ROTH ira since it is not an issue now. The rest of her SEP-IRA's are all in the same place. I reduces her income by $3000 every year so we will keep doing it but it is really a PIA because she gets so confused by it.

Hope your client isn't just confused or that the bank isn't confusing them too.

Linda, EA