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General Finance – SEP IRA Continued

Q : Thank you very much for writing me back. I will be rolling over my 401 for sure. It’s nice to know I qualify for a SEP, unfortunately if I can only contribute 25% of my (DJ) income to the SEP, we are only talking about 25% of roughly $15K gross…by the time I deduct expenses, let’s say I’m at $12,500.00 net before taxes. So, 25% of the $12,500.00 would be $3,125.00…well under the $52,000.00 limit.

 

My real income comes from my sales job, but it sounds like I can’t put that income into my SEP? If this is the case, maybe the SEP is pointless?

 

I will need to make sure my long term 401 is funded to a point where I am happy and then find another place to put money from my sales job, maybe a Roth IRA, mutual funds, stocks etc.

 

Thanks again. This can be confusing for someone that is employed full time, has a fluctuating sales income and also runs their own business on the side. I wonder if I need to incorporate my DJ business to qualify for the SEP.

 

A :  No problem. From your first email I wasn’t sure what the breakdown was between your self employed (1099 income) vs your sales (W-2) income.

 

But yes, you can only fund a SEP with self employed (1099 income). You cannot fund a SEP with your sales (W-2) income. With that being understood, you could:

 

1)      Fully fund a Roth at $5,500 / yr with after tax dollars which can be withdrawn later tax free

 

2)      Fully fund a Traditional IRA at $5,500 / yr and deduct that contribution from your taxable income which can be withdrawn later at ordinary income tax (since you are not eligible for an employer plan, you can deduct your IRA contribution)

 

In addition to these two options you can also open a taxable brokerage account at Vanguard, Schwab, Fidelity, etc and invest what you would have invested in your 401K in an allocation similar to your 401K allocation. You are simply just taking control instead of going through your company’s plan administrator. While your contributions to a taxable account are not tax deferred you are still saving for your future and taking advantage of compounding interest.

 

As far as your current 401K, you can roll that over into a traditional IRA. If you wanted to convert that to a Roth, you would pay ordinary income tax on the gain.


 

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