SEP IRA and 401K

[DaveinTexas]

Here's the situation: My client gets a W2 and a 1099 from the same company; something to do with commissions paid from a third party investment firm. Anyhow, he contributed the maximum amount to his 401K for 2006 or $15,000.

Can he then contribute the max to a SEP, $44,000? In the Tax Book, it states that the amount an individual can contribute to a SEP is reduced by the amount of elective deferrals to a defined benefit plan.

I'm trying to find out if a 401K is classified as a defined benefit plan and if so, my clients total SEP contribution is limited to $29,000 for 2006.

Does this sound right or are the plans exclusive of one another? I can't find this information anywhere.

TIA

[Jade06]

Here's the situation: My client gets a W2 and a 1099 from the same company; something to do with commissions paid from a third party investment firm. Anyhow, he contributed the maximum amount to his 401K for 2006 or $15,000.

Can he then contribute the max to a SEP, $44,000? In the Tax Book, it states that the amount an individual can contribute to a SEP is reduced by the amount of elective deferrals to a defined benefit plan.

I'm trying to find out if a 401K is classified as a defined benefit plan and if so, my clients total SEP contribution is limited to $29,000 for 2006.

Does this sound right or are the plans exclusive of one another? I can't find this information anywhere.

TIA

A 401K is classified as a defined benefit plan.

Jade!!

[jasdlm]

I disagree

A 401(k) is a defined contribution plan.

[Jade06]

SEP is reduced by the amount of elective deferrals to a defined benefit plan.

If the 401(k) is a benefit from work that has elective deferrals it qualifies. I would think.

Jade!!

[DaveinTexas]

No one

really answered the question.


Or did I miss it?

Sorry, long day!!!

[New York Enrolled Agent]

A SEP has NO elective deferrals (SAR-SEPs - not applicable here - have elective deferrals). Thus I believe the 15K is not relevant.

The 44K is the MAXIMUM you can contribute but remember the limitation on a SEP is 25% (reduced to 20% for a Schedule C taxpayer) of the net earnings on the schedule C less the ½ of the SE tax. Thus your client needs a lot of income to reach 44K.

[OldJack]

Since he is a plan participant at his W2 employer (retirement box checked on W2), the 1040 income limitation may keep him from contributing to a self-employed SEP-IRA for his Sch-C income.

[New York Enrolled Agent]

Old Jack

§219 contains the income limitations. Take a look at §219(b)(2) -

2) Special rule for employer contributions under simplified employee pensions.
This section shall not apply with respect to an employer contribution to a simplified employee pension.

The IRC section regarding SEPs is in §408(k). §408(k)(7) gives the defintions of employer the same meaning as defined in §401(c). Finally, §401(c) contains in part the following:

(4) Employer.
An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer

Thus, I don't believe the limitations are in effect here but I stand to be corrected if I'm missing something.

[JCH]

I believe the limit is $44,000, including his contribution to the SEP and 401(k). In other words, his maximum contribution to the SEP would be $29,000.

[DaveinTexas]

I appreciate all of the responses

The client's 1099 MISC is over $500k with minimal expenses so I think the income limitation is solved.

I appreciate the cites and the hard work guys.

Thanks again,

Dave

[OldJack]

Well... I don't know what I was thinking. Of course a self-employed person can have a SEP-IRA even if they participate as an employee elsewhere.