SEP IRA & Catch Up (50 yrs Old) Contributions

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Piper59
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SEP IRA & Catch Up (50 yrs Old) Contributions

Post by Piper59 »

As a sole owner, I'm currently maxing out my contributions to my SEP. I'm slightly off the maximum amount but am contributing based on the total percentage of compensation (25%).

Is there a way when I turn 50 in January that I can also participate in the "Catch Up Contributions". I've read that "Catch Up Contributions" do not apply to SEPs. Is there a creative and legal way around this?

Thanks!!

Piper
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Lee_WSP
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Re: SEP IRA & Catch Up (50 yrs Old) Contributions

Post by Lee_WSP »

You cannot exceed the percentile limits of your self employed income or W-2 income. You should instead start a solo 401k with profit sharing.
Topic Author
Piper59
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Re: SEP IRA & Catch Up (50 yrs Old) Contributions

Post by Piper59 »

Lee_WSP wrote: Mon Oct 18, 2021 12:46 pm You cannot exceed the percentile limits of your self employed income or W-2 income. You should instead start a solo 401k with profit sharing.
Good call- will reach out to Vanguard and get that solo 401k with profit sharing started. Thanks for help
SuzBanyan
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Re: SEP IRA & Catch Up (50 yrs Old) Contributions

Post by SuzBanyan »

Piper59 wrote: Tue Oct 19, 2021 10:55 am
Lee_WSP wrote: Mon Oct 18, 2021 12:46 pm You cannot exceed the percentile limits of your self employed income or W-2 income. You should instead start a solo 401k with profit sharing.
Good call- will reach out to Vanguard and get that solo 401k with profit sharing started. Thanks for help
In most cases*, the business cannot maintain a SEP and a 401k for the same plan year. As a result, make sure your 401k plan is not effective until 2022. Unless you make a contribution to the SEP for 2022 or later, the business is not considered to be mailing the SEP for those years. For a 401k, the business is considered to be maintaining that plan from it effective date until termination, even if no contributions are made.

*The exception is if the business has a non-5305 SEP. A business can maintain both a non-5305 SEP and a 401k for the same plan year. Of the commercial brokerages, I believe that only Schwab offers a non-5305 SEP. If you SEP is with Vanguard or Fidelity, then the above advice applies.
Namashkar
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Re: SEP IRA & Catch Up (50 yrs Old) Contributions

Post by Namashkar »

SuzBanyan wrote: Tue Oct 19, 2021 7:55 pm
Piper59 wrote: Tue Oct 19, 2021 10:55 am
Lee_WSP wrote: Mon Oct 18, 2021 12:46 pm You cannot exceed the percentile limits of your self employed income or W-2 income. You should instead start a solo 401k with profit sharing.
Good call- will reach out to Vanguard and get that solo 401k with profit sharing started. Thanks for help
In most cases*, the business cannot maintain a SEP and a 401k for the same plan year. As a result, make sure your 401k plan is not effective until 2022. Unless you make a contribution to the SEP for 2022 or later, the business is not considered to be mailing the SEP for those years. For a 401k, the business is considered to be maintaining that plan from it effective date until termination, even if no contributions are made.

*The exception is if the business has a non-5305 SEP. A business can maintain both a non-5305 SEP and a 401k for the same plan year. Of the commercial brokerages, I believe that only Schwab offers a non-5305 SEP. If you SEP is with Vanguard or Fidelity, then the above advice applies.
What is a ‘solo 401K plan with profit sharing’ How does it let you exceed the 25% limit of SEP? A detailed example will be highly appreciated.

Thanks
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Lee_WSP
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Re: SEP IRA & Catch Up (50 yrs Old) Contributions

Post by Lee_WSP »

Namashkar wrote: Tue Oct 19, 2021 9:29 pm
SuzBanyan wrote: Tue Oct 19, 2021 7:55 pm
Piper59 wrote: Tue Oct 19, 2021 10:55 am
Lee_WSP wrote: Mon Oct 18, 2021 12:46 pm You cannot exceed the percentile limits of your self employed income or W-2 income. You should instead start a solo 401k with profit sharing.
Good call- will reach out to Vanguard and get that solo 401k with profit sharing started. Thanks for help
In most cases*, the business cannot maintain a SEP and a 401k for the same plan year. As a result, make sure your 401k plan is not effective until 2022. Unless you make a contribution to the SEP for 2022 or later, the business is not considered to be mailing the SEP for those years. For a 401k, the business is considered to be maintaining that plan from it effective date until termination, even if no contributions are made.

*The exception is if the business has a non-5305 SEP. A business can maintain both a non-5305 SEP and a 401k for the same plan year. Of the commercial brokerages, I believe that only Schwab offers a non-5305 SEP. If you SEP is with Vanguard or Fidelity, then the above advice applies.
What is a ‘solo 401K plan with profit sharing’ How does it let you exceed the 25% limit of SEP? A detailed example will be highly appreciated.

Thanks
https://www.guideline.com/blog/profit-s ... t-benefit/
Charon
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Re: SEP IRA & Catch Up (50 yrs Old) Contributions

Post by Charon »

Namashkar wrote: Tue Oct 19, 2021 9:29 pm What is a ‘solo 401K plan with profit sharing’ How does it let you exceed the 25% limit of SEP? A detailed example will be highly appreciated.
A solo 401(k) allows employee-side contributions (which includes catch-up contributions) and employer-side profit-sharing contributions (with limits as a percentage of profits; exactly what percentage depends on how the business is structured). So the employer side is still subject to low percentage limits, but the employee side is not. The employee side is just like any other 401(k).
Admiral
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Re: SEP IRA & Catch Up (50 yrs Old) Contributions

Post by Admiral »

Just make sure you understand that a Solo401k is a bit more complex to maintain and report than a SEP, which basically has little or no reporting requirements. So Form 5500-EZ etc.

Not saying it's not worth it, only that the added benefit/value should be weighed against the paperwork.
Topic Author
Piper59
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Joined: Tue Nov 21, 2017 3:48 pm

Re: SEP IRA & Catch Up (50 yrs Old) Contributions

Post by Piper59 »

All thanks for your help on this - to confirm, here's my plan:
1. I continue contributing max I can as a "Solo-preneur" to the SEP (Eligible 25%)
2. In 2022, in the year I turn 50, I setup a Solo 401k (with profit sharing?) and contribute the eligible $6,500 for Tax Year 2022. Confirming, can I contribute more on this side as an employee (LLC)? I thought I could only contribute the catch up given I'm maxing the SEP IRA.

Correct? did I miss anything or misunderstand? I also am weighing the additional paperwork needed to be done by my CPA to handle this moving forward. Also - the SEP is with Vanguard and I'm planning the solo 401k to also be with Vanguard.

BTW - found this good video/website on the topic
https://www.irafinancialgroup.com/learn ... d-sep-ira/
SuzBanyan
Posts: 2015
Joined: Thu Jun 02, 2016 11:20 am

Re: SEP IRA & Catch Up (50 yrs Old) Contributions

Post by SuzBanyan »

Piper59 wrote: Tue Nov 09, 2021 8:24 pm All thanks for your help on this - to confirm, here's my plan:
1. I continue contributing max I can as a "Solo-preneur" to the SEP (Eligible 25%)
2. In 2022, in the year I turn 50, I setup a Solo 401k (with profit sharing?) and contribute the eligible $6,500 for Tax Year 2022. Confirming, can I contribute more on this side as an employee (LLC)? I thought I could only contribute the catch up given I'm maxing the SEP IRA.

Correct? did I miss anything or misunderstand? I also am weighing the additional paperwork needed to be done by my CPA to handle this moving forward. Also - the SEP is with Vanguard and I'm planning the solo 401k to also be with Vanguard.

BTW - found this good video/website on the topic
https://www.irafinancialgroup.com/learn ... d-sep-ira/
If your SEP is with Vanguard, you cannot have both a SEP and a 401k. You would need to amend your SEP to a plan at Schwab if you want both plans.

But there is no reason to maintain a SEP if you are switching to a 401k.

If you have a Solo 401k and are eligible for a catch-up contribution with net business income of $100,000, then if you had this plan instead of the SEP in 2021: “Your maximum solo 401(k) contribution for 2021 is $44,587, which consists of:
An employee contribution of $19,500, plus
An employer contribution of $18,587.05, plus
A catch-up contribution of $6,500.”

This is from Mike Piper’s excellent calculator: https://obliviousinvestor.com/solo-401k ... alculator/

In contrast, the maximum such an owner could contribute to a SEP is about $18,587.

This assumes that you don’t have another job in which you already participate in a retirement program such as a 401k.
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