SEP-IRA Contribution

[cons]

I'm not very familiar with the IRS tax laws regarding SEP-IRAs, so I'm hoping that maybe you knowledgeable posters here can steer me in the right direction. Here's my situation:

-I'm a federal employee and contribute max to TSP ($15k)
-I'm married and contribute max to both ROTH IRAs
-I opened up a small business (bakery) earlier this year and hope to max out my SEP-IRA

I'm a co-owner of this incorporated business (myself and one other partner), and one employee (Brother-In-Law). Just the 3 of us, no one else. Neither my partner nor BIL are interested in any type of self-employed retirement accounts for themselves. They basically told me to do whatever I wanted to do regarding my self-employed retirement account. Thus, I felt that the SEP-IRA was, and is, the best choice for me given my info above. Would you agree?

I have yet to contribute to the SEP-IRA as I don't know what my income will be from this business. However, I do know that the contribution, according to the IRS, will be 25% of my self-employment income. I plan on contributing a lump sum in February/March of next year, which is when I'll know exactly how much I can contribute to the SEP-IRA. I figure I'll be able to contribute in the $4k to $5k range to the SEP-IRA.

My questions are:

1-Can I consider myself an employer and employee in order to contribute more into the SEP-IRA?
2-How would these funds be deducted and contributed into the SEP-IRA come Feb/March when I plan to set it up?
3-Once the SEP-IRA is fully funded in Feb/March, can I roll it over into my TSP? Would this be difficult to do? Does anyone have any experience in doing this?
4-Is it true that I can max out my TSP, 2 ROTH IRAs, and SEP-IRA all in the same tax year?
5-I've already reached the FICA limit from my income as a federal employee, does this mean I don't have to pay any FICA taxes on my self-employed income?


Thanks for any responses, comments, suggestions.

Ed

 

[TromboneAl]

I can only answer #2 confidently: Just open a SEP-IRA account with, for example, Vanguard. Calculate you max contribution, send it in, and enter the value on the appropriate line on your tax return. It's that easy -- that's why I chose the SEP-IRA route.

Note also that you can convert it to a Roth in the future.

 

[Patrick]

I can only answer #2 confidently: Just open a SEP-IRA account with, for example, Vanguard. Calculate you max contribution, send it in, and enter the value on the appropriate line on your tax return. It's that easy -- that's why I chose the SEP-IRA route.

Note also that you can convert it to a Roth in the future.

Hey, Al, can I move my S&P 500 shares from Schwab over to Vanguard without having to liquidate them and thereby incurring capital gains taxes?

Thanks.

 

[Kwirk]

I'm not an expert but I have a similar situation. If you are maxing your TSP contribution I don't think that you can contribute to the SEP IRA as an employee. You can, I believe, make the employer SEP contribution.

 

[Martha]

I recommend reading two IRS publications: Publication 590 on IRAs and publication 560 on employer retirement plans: http://www.irs.gov/publications/p590/index.html
http://www.irs.gov/publications/p560/index.html


I know nothing about TSPs and how they would effect your ability to contribute to IRAs.

I do know that you can contribute both to a Roth IRA and a SEP.
Also, as the "employer" you can make both an employee and employer contribution.
However, you may very well have to make employer contributions to the other owners/employees to get one yourself.

I believe, but am not searching for a citation, that you will have to still pay in the self employment tax or FICA even though you are over the social security limit, but will be able to get a refund for the employee share. I do know you will not be able to get a refund for the employer share of the self employment tax or FICA.

 

[retire@40]

I strongly recommend you find yourself a local CPA and set up an hour meeting to go over your options.

You and others here are mixing up terminology and getting to half-right answers.

Reading the publications is the best answer given so far and would serve as a good primer for your meeting.

 

[Martha]

OK retire@40, to not mix terminology and to clarify what I said, the OP said the side business is in a corporation so the corporation is the employer and can establish a SEP and make employer contributions. However, the employer contributions will have to be made to other eligible employees. So, you need to make sure you know the rules for contributions. Retire@40 is right; you should see a CPA to talk about those options.

Also, the employer corporation will have to withhold FICA even if you already maxed out with a different employer. But, you can get a refund of the employee share.


I still know nothing about TSPs and whether that limits your ability to make employee contributions to another plan.

I still stand by what I said regarding Roth IRAs. You can contribute to both a SEP and a Roth.

Better explanation?

Sorry for being "half right." But really, form over substance.

I do agree, retire@40, that a consultation with a professional is necessary.

 

[Martha]

I'll add something here that retire@40 is alluding to when he mentions mixing terminology.

When you form a corporation to own a business, the corporation is a separate entity from the owners. Owners are shareholders in the corporation and may also be employees. You are not self employed if you work for a corporation where you are a shareholder. The corporation is your employer. Sometimes people refer to their co-owners as their partners. This is technically incorrect. Partners are owners of partnerships. Not corporations.

As an employee of a corporation who works for the corporation, you get paid a salary and have taxes and FICA withheld, just like for any other job. The corporation also has to pay the employer share of FICA. The corporation may also pay you a dividend or distribution if it makes a lot of money. So, you get salary as an employee and dividends or "distributions" as a shareholder.

You can have S corporations or C corporations. If you are an owner of an S corporation, the income taxes and deductions get passed through to you as a shareholder. If it is a C corporation, the corporation pays its own taxes and deducts its own expenses.

 

[retire@40]

... If you are an owner of an S corporation, the income taxes and deductions get passed through to you as a shareholder....

I know you meant to say "net income" instead of "income taxes" and "some of the deductions" instead of just "deductions."

 

[Martha]

I know you meant to say "net income" instead of "income taxes" and "some of the deductions" instead of just "deductions."

OK, ok.

TH was right; you are a noodge.

Next time, you answer the questions and I will criticize.

 

[retire@40]

Sorry for being "half right." But really, form over substance.

Actually, it should be "substance over form" too.

Sorry for galting.

 

[Martha]

Screw you.

 

[cons]

i apologize if there was any confusion in the original post.

the reason why i posted this today was because i had this on the back-burner for a while now. i didn't have any time to even ponder about the SEP until recently. and as late as it is, i still have about another 4-5 months to figure out how this would pan out. i just thought that i could get some responses as to what the best course of action would be for someone in my situation.

it is a partnership and the business is incorporated. as far as i know, it is neither an s-corp or a c-corp.

the other business partner is the one who is in touch with the cpa. i honestly don't know the last time he contacted the cpa. but i'm sure we can set something up with the cpa.

http://www.irs.gov/publications/p560/ch02.html#d0e1078 states the following:

If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $42,000 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.



SEP and defined contribution plan. If you also contribute to a qualified defined contribution plan, you must reduce the 25% deduction limit for that plan by the allowable deduction for contributions to the SEP-IRAs of those participating in both the SEP plan and the defined contribution plan.


the way i understand it is that because i contribute the max to the TSP, i can't contribute to a SEP-IRA as an employer?...or does it mean that i can contribute up to $29k ($44k-$15k = $29k) to the SEP-IRA?

the TSP is the federal government version of the 401k.

i did read that one can max out both the ROTH and SEP. but what if you're maxing out a 401k (ie TSP), is it still legal to max out the SEP as an employer? If not, is there another self-retirement account choice/option available to me?

thanks again, and i hope i cleared things up.

 

[retire@40]

...it is a partnership and the business is incorporated. as far as i know, it is neither an s-corp or a c-corp...

Martha,

I would try to answer, but I honestly don't know where to begin.

 

[Martha]

Martha,

I would try to answer, but I honestly don't know where to begin.

OK, since I lost my temper with you, I'll start.

i apologize if there was any confusion in the original post.

And I apologize for having a spat with another poster.

it is a partnership and the business is incorporated. as far as i know, it is neither an s-corp or a c-corp.

It can't be a partnership if it is incorporated. If it is incorporated it is a corporation. It has to be a partnership OR a corporation. It would be a good idea to know which. Generally, a corporation is advisable because of liability concerns.

the other business partner is the one who is in touch with the cpa. i honestly don't know the last time he contacted the cpa. but i'm sure we can set something up with the cpa.

Good idea. You big issue is whether you have to contribute to a SEP for all the employees.

http://www.irs.gov/publications/p560/ch02.html#d0e1078 states the following:

If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $42,000 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.



SEP and defined contribution plan. If you also contribute to a qualified defined contribution plan, you must reduce the 25% deduction limit for that plan by the allowable deduction for contributions to the SEP-IRAs of those participating in both the SEP plan and the defined contribution plan.


the way i understand it is that because i contribute the max to the TSP, i can't contribute to a SEP-IRA as an employer?...or does it mean that i can contribute up to $29k ($44k-$15k = $29k) to the SEP-IRA?

the TSP is the federal government version of the 401k.

i did read that one can max out both the ROTH and SEP. but what if you're maxing out a 401k (ie TSP), is it still legal to max out the SEP as an employer? If not, is there another self-retirement account choice/option available to me?

thanks again, and i hope i cleared things up.

http://www.investopedia.com/articles/retirement/05/commonquestions.asp

This is a good discussion of how contribution limits work. You employee contribution to all your defined contribution plans, like 401ks, SEPs, and if a TSP is a defined contribution plan, will be limited to $15,000 for 2006, or $20,000 if you are 50 or over. Your employer contributions should not be effected by having multiple plans.

 

[Mr._johngalt]

Actually, it should be "substance over form" too.

Sorry for galting.

Hey, galting is a good thing. The way the word is expanding, Webster's
may need to put out a special printing. Galting, galted, galtlike,
galtified, post (no pun intended) galt, pre-galt, galt-thread
(I like that one),
galtthink. Reminds me of groupthink
although galtthink would be kind of opposite. Well, enough of that. You get the idea.

JG