SEP IRA contribution

[Questionguy101]

Facts:
Taxpayer's self-employed income is $4,500.
Taxpayer has a SEP IRA and the contribution rate is 25%
Taxpayer has contributed $4,000 to his regular IRA already.
Based on 25% contribution rate, the maximum amount that he can contribute to his SEP IRA is $837.

Question:
Can the taxpayer contribute the maximum $837 to his SEP IRA? If yes, he will have a total contribution of $4,837 contribution to his regular IRA and his SEP IRA, which exceeds his self-employed income of $4,500. Is it ok?

[BP.]

Facts:
Taxpayer's self-employed income is $4,500.
Taxpayer has a SEP IRA and the contribution rate is 25%
Taxpayer has contributed $4,000 to his regular IRA already.
Based on 25% contribution rate, the maximum amount that he can contribute to his SEP IRA is $837.

Question:
Can the taxpayer contribute the maximum $837 to his SEP IRA? If yes, he will have a total contribution of $4,837 contribution to his regular IRA and his SEP IRA, which exceeds his self-employed income of $4,500. Is it ok?

Does he have other compensation for the year?

[Roland Slugg]

Yes

Your figures of $4,500 and $837 don't match. If the $837 amount is correct, the income (prior to the SEP calculation) must have been $4,185 (± $2). If this is correct, the T/P can contribute the full $4,000 to a traditional IRA if he meets the income phaseout limitations. The T/P's S-E income is not reduced by his SEP contribution.

[Questionguy101]

Does he have other compensation for the year?

He doesn't. But his wife has W-2 income of over $50,000. I believe that doesn't have anything to do with how much he can contribute to his SEP-IRA though.

[Questionguy101]

Your figures of $4,500 and $837 don't match. If the $837 amount is correct, the income (prior to the SEP calculation) must have been $4,185 (± $2). If this is correct, the T/P can contribute the full $4,000 to a traditional IRA if he meets the income phaseout limitations. The T/P's S-E income is not reduced by his SEP contribution.

Thank you. Those are not exact amounts. I just made up an example to find out whether it is allowable for the combined contribution to exceed the self-employed income. Based on your answer, now I know it is allowable. Thank you.

[BP.]

He doesn't. But his wife has W-2 income of over $50,000. I believe that doesn't have anything to do with how much he can contribute to his SEP-IRA though.

It wouldn't affect the SEP IRA contribution amount, but you were questioning IRA contributions that were possibly more than 100% of compensation (TTB 13-2) if no other earnings (or spousal earnings) were present.

The $837 on net S/E income of $4,500 is correct. TTB 13-16: $4,500 x 18.587%

[Questionguy101]

It wouldn't affect the SEP IRA contribution amount, but you were questioning IRA contributions that were possibly more than 100% of compensation (TTB 13-2) if no other earnings (or spousal earnings) were present.

The $837 on net S/E income of $4,500 is correct. TTB 13-16: $4,500 x 18.587%

Thank you.

Why would they let someone's total contribution to his IRA accounts be more than his self-employed income (which is also his total income) is beyond me. What's the reasoning behind it? I am just curious.

[Bees Knees]

Your figures of $4,500 and $837 don't match. If the $837 amount is correct, the income (prior to the SEP calculation) must have been $4,185 (± $2). If this is correct, the T/P can contribute the full $4,000 to a traditional IRA if he meets the income phaseout limitations. The T/P's S-E income is not reduced by his SEP contribution.

Wrong.

TTB, page 13-9 says:

• Net earnings from self-employment as a sole proprietor or a
partner of a partnership, reduced by the deduction for one-half
of SE taxes and any deductions for contributions to a qualified
retirement plan. Net SE earnings also include income not subject
to SE tax due to a religious election to be excluded from
Social Security coverage.

A SEP-IRA is a qualified plan. So if the max SEP contribution of $836 is made, The SE income must be reduced by both 1/2 SE tax and the SEP before calculating the amount that can be contributed to the IRA.

$4,500 minus $318 minus $836 = $3,346 maximum IRA contribution.

Of course, when you throw the wife's $50,000 W-2 into the mix, the full $4,000 IRA contribution is allowed, but only because the SE income is combined with the W-2 income. If there were no W-2 earnings, the max IRA would be $3,346.

[Bees Knees]

Why would they let someone's total contribution to his IRA accounts be more than his self-employed income (which is also his total income) is beyond me. What's the reasoning behind it? I am just curious.

They don't.

The only reason you can do the full $4,000 is because of the Wife's W-2. Otherwise you could not exceed SE income minus the SEP minus 1/2 SE tax.

[Roland Slugg]

Wrong.

Ahhh ... such a lovely reply.

The original post asked about the "contribution" limit, not the "deduction" limit. Without additional income, such as his own or wife's W-2 income, the deduction limitation would apply, but his contribution limit would still be $4,000. The difference, if any, would be reported on F-8606 as a non-deductible contribution. The original post did not give enough information to determine the deduction limit.

[Gene V]

Ahhh ... such a lovely reply.

The original post asked about the "contribution" limit, not the "deduction" limit. Without additional income, such as his own or wife's W-2 income, the deduction limitation would apply, but his contribution limit would still be $4,000 The difference, if any, would be reported on F-8606 as a non-deductible contribution. The original post did not give enough information to determine the deduction limit.

Per his original post, the contribution limit and deductible limit will be the same.
($3346) he can not report any excess on Form 8606. He is not allow to contribute
$4,000.00

[Bees Knees]

Ahhh ... such a lovely reply.

The original post asked about the "contribution" limit, not the "deduction" limit. Without additional income, such as his own or wife's W-2 income, the deduction limitation would apply, but his contribution limit would still be $4,000. The difference, if any, would be reported on F-8606 as a non-deductible contribution. The original post did not give enough information to determine the deduction limit.

You think the original poster only cared about the contribution limit and not the deduction limit?

You are correct, however, in that Section 408(a)(1) limits the IRA contribution to $4,000, regardless of whether or not there is any earned income. It is the deduction limit under Section 219(b)(1)(B) that is limited to compensation.