SEP-IRA

Vicky,

I believe you're getting the SIMPLE IRA and SEP IRA confused. One allows deductions no matter the percentage; the other allows only up to 20% of self-employed income. So you CAN put up to $10,000 (for 2005) regardless of income into a SIMPLE.

Here's a table:

http://www.tdwaterhouse.com/planning...ess/index.html

I looked around a lot on the web and I see the same 402(g) contribution limit everywhere. This is an example:

Question: If I make the maximum 401(k) plan deferral contributions with my employer, can I also make the maximum deferral contributions to a SIMPLE IRA plan for a side business that I have?

Answer: No, you cannot make the maximum salary deferral contributions to both. The salary deferral limit is a personal limit not just a plan limit. Under IRC Section 402(g) the 401(k) plan salary deferral limit for 2004 is $13,000. Under IRC Section 408(p) the SIMPLE IRA deferral 2004 limit is $9,000. Under IRC Section 402(g)(3) you must aggregate both types of deferrals and apply the $13,000 limit as an overall personal limit for 2004. However, if you contribute the maximum salary deferrals available to you and you are at least age 50 in 2004, your plans may also allow you to make additional catch-up contributions of $3,000 to the 401(k) plan and $1,500 to the SIMPLE IRA plan. For more information and to best determine your available opportunities have a tax or legal professional check your SIMPLE IRA plan document and the summary plan description for your 401(k) plan.

Will talk to the CPA at tax time, I am getting more and more confused. I think the IRS does not want people to have a side business with a whole bunch of extra deductions and then on top of that shelter whatever income there is all tax-free.

Vicky

[eridanus]

Bringing this thread back from the dead.

http://www.irs.gov/publications/p560/ch02.html#d0e1045

SEP:
"More than one plan. If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $41,000 or 100% of the participant's compensation. When you figure this limit, you must add your contributions to all defined contribution plans. Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans."

http://www.irs.gov/publications/p560/ch03.html#d0e1883

SIMPLE:

"If an employee is a participant in any other employer plan during the year and has elective salary reductions or deferred compensation under those plans, the salary reduction contributions under a SIMPLE IRA plan also are elective deferrals that count toward the overall annual limit ($13,000 for 2004) on exclusion of salary reduction contributions and other elective deferrals."


Notice that a SEP is more beneficial for those with another plan at their day job. This, I believe, is because a SEP is a profit-sharing plan rather then an elective deferral plan. In a SEP, the employer makes the contributions - in a SIMPLE, the employee makes the contributions.



*Usual disclaimer: I'm no CPA, tax attorney, blahblah. Don't believe everything you read on the net.