Question about SEP-IRA contributions

[ordway]

I just got a new job (it's not a dirty word in the Young Dreamers forum ) as a technical writer. I'll be working as a contractor, so I'll be paying self-employment taxes and contributing to my SEP-IRA (which I already have set up, since a few years ago I did contracting as well). (BTW, I already fully fund a Roth IRA and have no debt of any kind; any money that doesn't make it into the SEP-IRA will go into the taxable investments.)

Anyway... I've been trying to figure out how much I can put into the SEP-IRA and having a bit of a tough time getting the details straight. The IRS publications I read said that I could put up to 25% of my self-employed income into the SEP-IRA. But then it turns around and says that my *deductible* contribution has to be figured with that bizarro-world circular calculation involving how much I paid in self-employment taxes.

So... If I understand this correctly, I can contribute 25% of my income, but when tax time comes, I can only *deduct* the amount yielded by the bizarro calculation? (Meaning that I would have contributed more than I can deduct on my taxes.)

I suppose I could just wait until tax time, let Turbo Tax tell me how much my deductible contribution is and contribute that exact amount, but I don't want to get cheated out of a larger contribution just because I don't understand the ^*!&*! taxes. But I also don't want to over-contribute (if that's what putting in 25% would do) and find the IRS getting mad at me for putting in more than I should.

Oh, and if I *can* contribute more than I can deduct... does that make for any weird tax consequences down the line, when I take distributions? My head will explode if I have to keep track of dollars that went in pre-tax vs. post-tax in my SEP-IRA.

Thanks in advance for any help figuring this out!

 

[brewer12345]

Is there some reason why you wouldn't want to open a solo 401k instead? My research suggests that solo k's are usually the best way to maximize the amount of cash you tip into a tax-deductible retirement vehicle.

 

[Bob_Smith]

Holly, I'm sure you have seen the 19 step SEP Deduction Worksheet for the self-employed in IRS Publication 560. You're right - it is bizzaro. Why not just wait until the year is over, do the calculation then, and make one large contribution? You would be right on the money, and you wouldn't need to mess with pulling excess contributions out. That's probably what I'd do.

I don't know what your income or your age is, but have you looked at a SIMPLE IRA? If you're making less than ~$40,000 (~48,000 if you're 50 or more) you could probably contribute more to a SIMPLE without all the calculation headaches.

 

[brewer12345]

You can contribute the most at lower income levels to a solo k, up to 100% of your earnings if you are below $13k this year.

 

[Peter]

To expand on what brewer just said, a solo 401K allows most self employed people to contribute more than an SEP IRA. Here's some information from the Fidelity website:

http://personal.fidelity.com/products/retirement/getstart/newacc/keogh.shtml

I believe other firms, including Vanguard, offer solo 401k's as well.

Peter

 

[Nords]

Ed Slott's IRA discussion board

This is one of the best boards I've ever seen for tax-deferred investing issues.

http://www.irahelp.com/cgi-bin/forum/index.cgi/

There are three tireless CPAs-- Bruce Steiner, Mary Kay Foss, and Denise Appleby-- who delight in researching the most obscure abstruse questions and even interpreting the actual IRS tax code. All three have been published in other journals & websites, and they should be able to help you sort out the options (and the paperwork).

 

[ordway]

Thanks for the information about the self-employed 401k - apart from the nuisance value of setting up another account, it does look like the best bet. I'll do some more reading about that, but it's nice to see that Fidelity offers it (since I have my other investments with them and have been pleased with their service).

What I don't quite get is why there's such a profusion of different retirement plans for self-employed people... SEP-IRA, SIMPLE-IRA, Keogh, now the 401k... when I set up the SEP-IRA a few years ago it seemed the simplest to manage, but the profusion of options is enough to make my head swim...