Another Tax Question: IRA Contributions

[cube_rat]

My husband has his own business but also works part-time collecting a small salary teaching. I, on the other hand, work full time and max out my 401K contributions. We will be filing jointly this year. Can we fund an IRA (or fund an IRA in his name) and take it as a deduction?

I'm sorry for asking such dumb questions, it's just that we've never had to delve this deeply into taxland before. We received a good size windfall this year which has skewed our normal tax bracket to the high end. :P Oh, and we scooted by AMT by a nose hair.

[grumpy]

Yes, your husband can contribute to an IRA up to the IRA contribution limit so long as he has at least that much earned income. As to whether the contribution will be tax deductible or not depends on your combined adjusted gross income. Above a certain level (not sure what it currently is since I'm retired) the deduction phases out until it reaches zero at some point. I'm sure you can find the details on the IRS web site.

Grumpy

[eridanus]

I assume your husband has a solo 401k? If not, I'd highly recommend it. It is far more advantageous than a SIMPLE or SEP.

Fidelity and Schwab offer low-priced 401ks for small businesses/the self employed.

[shiny]

As long as you have enough earned income you can fund and IRA for your spouse even if he or she doesn't have earned income (Spousal IRA) whether is is deductable or not depends on your adjusted gross income like Grumpy said.

Have you looked into Solo 401ks? As a small business owner he can put quite a bit (20k or more?) into that and deduct it.

[cube_rat]

I searched for a simple 401k at fidelity with no luck. Does the plan go by another name?

[retire@40]

Originally Posted by cube_rat

I searched for a simple 401k at fidelity with no luck.* ** Does the plan go by another name?

Honestly, I don't think this is a do-it-yourself project for you.

If your husband has a small business, he should also have a CPA. He can give you the correct options for your situation.

This board "might" give you some input for a second opinion, but I wouldn't depend on it as your single source to make a decision for a retirement plan. The truth is that based on the info you gave us so far, nobody can tell you the best retirement plan(s) to select.

I've found the SEP to be much simpler than a 401K. I've been able to deduct about as much as I'd want to, and I have all the options of a regular IRA. And much less paperwork.

What are the advantages of a solo 401K over a SEP-IRA?

[cube_rat]

Originally Posted by retire@40

Honestly, I don't think this is a do-it-yourself project for you.

If your husband has a small business, he should also have a CPA. He can give you the correct options for your situation.

This board "might" give you some input for a second opinion, but I wouldn't depend on it as your single source to make a decision for a retirement plan. The truth is that based on the info you gave us so far, nobody can tell you the best retirement plan(s) to select.

Agreed. I'm just doing some pre-work so I know what to expect. I don't like suprises.

[Martha]

Originally Posted by cube_rat

My husband has his own business but also works part-time collecting a small salary teaching. I, on the other hand, work full time and max out my 401K contributions. We will be filing jointly this year. Can we fund an IRA (or fund an IRA in his name) and take it as a deduction?

If only one spouse is covered by a 401(k), then the other spouse can have a traditional IRA. Full deductibility for AGI less than $150,000; partial deductibility for AGI of $150,000-$160,000. If you are looking at a ROTH, the AGI limitations are the same. You can't have a ROTH for AGIs over $160,000. (The dollar limits are lower if you are single or filing separately).

For 2005, the maximum contributions into IRAs for an individual is $4000, plus an extra $500 if over 50.

The applicable IRS publication: http://www.irs.gov/publications/p590/

[shiny]

Did you search for "solo 401k" ? This is a newer thing. I looked into it last year for my dad and it seemed to allow a large amount to be defered. It is for business owners who don't have any employees, just themselves.

[Martha]

Originally Posted by TromboneAl

I've found the SEP to be much simpler than a 401K. I've been able to deduct about as much as I'd want to, and I have all the options of a regular IRA. And much less paperwork.

What are the advantages of a solo 401K over a SEP-IRA?

Solo 401(k)s you may be able to set aside more money than in a SEP-IRA. The total contribution limit for a Solo 401k plan in 2005 is $42,000 ($46,000 if age 50 or older). The annual contributions into a Solo 401k is made up of 2 parts: a tax deductible salary deferral of $14,000 ($18,000 if age 50 or older) plus an additional tax deductible profit sharing contribution of up to 25% of W-2 compensation if incorporated or 20% of self employment income as a sole proprietorship. A SEP IRA contribution limits are 25% of compensation, as much as $42,000 for 2005.

If you do the math, there are a number of circumstances where you could stick more in the solo 401(k). For example, if you made $14,000, you could put the whole amount in the 401(k), but only 25% of it in the SEP.

You can also borrow from a 401(k).

Here is the IRS publication on retirement plans for small businesses: http://www.irs.gov/publications/p560/index.html

[Martha]

Originally Posted by cube_rat

I searched for a simple 401k at fidelity with no luck. Does the plan go by another name?

A Simple 401(k) is something different. Look at solo or individual 401(k)s. You must have a business to have a Solo 401(k).

[lazyday]

There's also Keogh's, though I don't know if the new solo 401k's make the Keoghs a bad choice now, or not.

[Martha]

Originally Posted by lazyday

There's also Keogh's, though I don't know if the new solo 401k's make the Keoghs a bad choice now, or not.

Not a bad choice, but the solo 401(k) might give you a chance to put in more money. Also it is probably cheaper.

[. . . Yrs to Go]

Originally Posted by eridanus

I assume your husband has a solo 401k? If not, I'd highly recommend it. It is far more advantageous than a SIMPLE or SEP.

Fidelity and Schwab offer low-priced 401ks for small businesses/the self employed.

Thanks to eridanus and Martha!!!* This thread may have just paid my price of admission to the board.*

We have a SEP IRA, never heard of the solo 401(K) until now - looks like Vanguard doesn't offer the option*

This weekend's chore will be to figure out how to set one up.* Considering that we've already contributed to the SEP this year, does anyone know if we can switch to the solo this year or do we have to wait until 2006?* I'm sure the kind folks at Fidelity will be able to answer this question but any thoughts would be appreciated.*

[eridanus]

Originally Posted by . . . Yrs to Go

Considering that we've already contributed to the SEP this year, does anyone know if we can switch to the solo this year or do we have to wait until 2006? I'm sure the kind folks at Fidelity will be able to answer this question but any thoughts would be appreciated.

I'm not sure what you mean by "switch" but I have both a SEP and a 401k and contribute to both. The "profit-sharing" that goes into my SEP is based on my earnings after the 401k contributions, so if you've already contributed the max (20%/25%) to your SEP you may be out of luck. I do this for the reason you discovered - the SEP is handled at more brokers.


**Get tax advice from a professional and or consult the IRS web site.

[Martha]

Years to go, you definitely need to consult a professional. However, I believe that the money in your old plan, the SEP IRA, can be rolled over into a solo 401(k) once the plan is adopted.

I am not at all sure about continuing to maintain multiple plans for a single business--I had thought that you could only contribute to one plan and either had to rollover the old into the new or simply stop contributing to the old plan. But judging fro eridanus's comments, I could be wrong about that. Or it could be that eridanus is both an employee and self employed.

[. . . Yrs to Go]

Originally Posted by eridanus

**Get tax advice from a professional and or consult the IRS web site.

Well I have had a tax professional who somehow failed to inform me of this little detail that allows me to reduce my taxable income by another $14K.

I am a little surprised, though, that you can have two plans - a SEP and a 401(k). It seems as if the 401(k) is dedicated to a specific business and that you can have multiple 401(k)s set up for different businesses. But it sounds as if you are using a combination of a SEP and a 401(k) for the same business. Is that allowed?

[eridanus]

Originally Posted by . . . Yrs to Go

I am a little surprised, though, that you can have two plans - a SEP and a 401(k). It seems as if the 401(k) is dedicated to a specific business and that you can have multiple 401(k)s set up for different businesses. But it sounds as if you are using a combination of a SEP and a 401(k) for the same business. Is that allowed?

I think so but I'll find out in April. Though I am abiding by the contribution limits, it could raise a red flag.

http://www.irs.gov/publications/p560/ch02.html#d0e1176

Deduction Limits for Multiple Plans

For the deduction limits, treat all your qualified defined contribution plans as a single plan and all your qualified defined benefit plans as a single plan. See Kinds of Plans in chapter 4 for the definitions of defined contribution plans and defined benefit plans.

[psvn]

I just heard something the other day that has me concerned. I heard you can't contribute to a simple IRA and to a 401(k). I always heard you could do this, but under certa