SEP- IRA vs Traditional - can I choose which to use this year?

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boglebill2015
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SEP- IRA vs Traditional - can I choose which to use this year?

Post by boglebill2015 »

I work as a consultant, and have income both from 1099 and W2 sources.

In the last few tax years, the majority of my income came thru 1099. I also had W2 income in those years, but that employer offered no 401K or benefits of any type. As such, I put 25% of my 1099 consulting income into a SEP IRA. This was typically $40-$50K into my SEP IRA and is a nice feature of 1099 compensation.

In 2022, my main client was forced by calif regulations to classify me as an employee. Now the vast majority of my income is thru W2, but still with no 401K option (or any benefits for that matter). As a result, I only earned about 8K after expenses this year as 1099. Accordingly, if I contribute to my SEP-IRA, the max I could do is 2k. (25% of 8k)

My question is, can I do a 2022 traditional deductible IRA for 7K (am 54yo), even tho I have the SEP IRA established and have 1099 income that would enable me to do a (small) contribution to my SEP IRA this tax year.

Thanks for your help.
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cchrissyy
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by cchrissyy »

the individual IRA roth or traditional is an entirely separate limit from whatever you can put in a SEP IRA.
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tibbitts
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by tibbitts »

boglebill2015 wrote: Fri Jan 27, 2023 10:49 am I work as a consultant, and have income both from 1099 and W2 sources.

In the last few tax years, the majority of my income came thru 1099. I also had W2 income in those years, but that employer offered no 401K or benefits of any type. As such, I put 25% of my 1099 consulting income into a SEP IRA. This was typically $40-$50K into my SEP IRA and is a nice feature of 1099 compensation.

In 2022, my main client was forced by calif regulations to classify me as an employee. Now the vast majority of my income is thru W2, but still with no 401K option (or any benefits for that matter). As a result, I only earned about 8K after expenses this year as 1099. Accordingly, if I contribute to my SEP-IRA, the max I could do is 2k. (25% of 8k)

My question is, can I do a 2022 traditional deductible IRA for 7K (am 54yo), even tho I have the SEP IRA established and have 1099 income that would enable me to do a (small) contribution to my SEP IRA this tax year.

Thanks for your help.
The SEP IRA is completely unrelated to a Traditional or Roth contribution; I contributed to both for many years.
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boglebill2015
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by boglebill2015 »

To clarify, my question is can I do a 7k *deductible* IRA in 2022
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MP123
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by MP123 »

boglebill2015 wrote: Fri Jan 27, 2023 11:05 am To clarify, my question is can I do a 7k *deductible* IRA in 2022
If you make a contribution to the SEP-IRA for a year then you are covered by a workplace retirement plan for that year. For 2023 your deductible tIRA contribution will phaseout over an income range from $116-$136k MFJ if you are covered.
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boglebill2015
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by boglebill2015 »

MP123 wrote: Fri Jan 27, 2023 11:31 am If you make a contribution to the SEP-IRA for a year then you are covered by a workplace retirement plan for that year.
Yes, my plan was to NOT do the small SEP IRA contribution, and instead be able to deduct the 7K using a traditional IRA, as I would not be "covered". My quesiton is that does the presence of the SEP IRA from 2021 tax year make me covered, in the sense I have that option.
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boglebill2015
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by boglebill2015 »

[/quote]
The SEP IRA is completely unrelated to a Traditional or Roth contribution; I contributed to both for many years.
[/quote]

I dont think my initial question was clear. My question is, does the presence of the SEP IRA make me covered by a workplace plan and therefore not able to *deduct* a traditional IRA (I am over the income caps).
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MP123
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by MP123 »

boglebill2015 wrote: Fri Jan 27, 2023 12:12 pm
MP123 wrote: Fri Jan 27, 2023 11:31 am If you make a contribution to the SEP-IRA for a year then you are covered by a workplace retirement plan for that year.
Yes, my plan was to NOT do the small SEP IRA contribution, and instead be able to deduct the 7K using a traditional IRA, as I would not be "covered". My quesiton is that does the presence of the SEP IRA from 2021 tax year make me covered, in the sense I have that option.
The existence of the SEP does not make you an active participant for a year, only if you contribute. This rule is different for defined benefit plans where being eligible is sufficient to make one an active participant.

So, being able to take a $7k deduction from the tIRA contribution may be better than making a small SEP contribution and then the rest to tIRA, depending on your MAGI.
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by Northern Flicker »

tibbitts wrote: Fri Jan 27, 2023 10:52 am
boglebill2015 wrote: Fri Jan 27, 2023 10:49 am I work as a consultant, and have income both from 1099 and W2 sources.

In the last few tax years, the majority of my income came thru 1099. I also had W2 income in those years, but that employer offered no 401K or benefits of any type. As such, I put 25% of my 1099 consulting income into a SEP IRA. This was typically $40-$50K into my SEP IRA and is a nice feature of 1099 compensation.

In 2022, my main client was forced by calif regulations to classify me as an employee. Now the vast majority of my income is thru W2, but still with no 401K option (or any benefits for that matter). As a result, I only earned about 8K after expenses this year as 1099. Accordingly, if I contribute to my SEP-IRA, the max I could do is 2k. (25% of 8k)

My question is, can I do a 2022 traditional deductible IRA for 7K (am 54yo), even tho I have the SEP IRA established and have 1099 income that would enable me to do a (small) contribution to my SEP IRA this tax year.

Thanks for your help.
The SEP IRA is completely unrelated to a Traditional or Roth contribution; I contributed to both for many years.
If you contribute to a SEP-IRA, it qualifies as being covered by a work retirement plan in the tax year of the SEP contribution. This currently puts income limits in place for a trad IRA contribution to be partially or fully deductible.
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by tibbitts »

Northern Flicker wrote: Fri Jan 27, 2023 12:39 pm
tibbitts wrote: Fri Jan 27, 2023 10:52 am
boglebill2015 wrote: Fri Jan 27, 2023 10:49 am I work as a consultant, and have income both from 1099 and W2 sources.

In the last few tax years, the majority of my income came thru 1099. I also had W2 income in those years, but that employer offered no 401K or benefits of any type. As such, I put 25% of my 1099 consulting income into a SEP IRA. This was typically $40-$50K into my SEP IRA and is a nice feature of 1099 compensation.

In 2022, my main client was forced by calif regulations to classify me as an employee. Now the vast majority of my income is thru W2, but still with no 401K option (or any benefits for that matter). As a result, I only earned about 8K after expenses this year as 1099. Accordingly, if I contribute to my SEP-IRA, the max I could do is 2k. (25% of 8k)

My question is, can I do a 2022 traditional deductible IRA for 7K (am 54yo), even tho I have the SEP IRA established and have 1099 income that would enable me to do a (small) contribution to my SEP IRA this tax year.

Thanks for your help.
The SEP IRA is completely unrelated to a Traditional or Roth contribution; I contributed to both for many years.
If you contribute to a SEP-IRA, it qualifies as being covered by a work retirement plan in the tax year of the SEP contribution. This currently puts income limits in place for a trad IRA contribution to be partially or fully deductible.
Excellent point that I had forgotten since I'd never encountered limits.
Northern Flicker
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by Northern Flicker »

To answer the OP's question, my understanding is that what makes a SEP-IRA qualify as being covered by a work retirement plan in a given tax year is making a SEP-IRA contribution for that tax year. Just having assets in a SEP-IRA from prior years or just having a SEP-IRA set up will not by themselves qualify as being covered by a work retirement plan in the current tax year.

https://www.irs.gov/retirement-plans/ar ... ement-plan
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boglebill2015
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by boglebill2015 »

Northern Flicker wrote: Fri Jan 27, 2023 2:18 pm To answer the OP's question, my understanding is that what makes a SEP-IRA qualify as being covered by a work retirement plan in a given tax year is making a SEP-IRA contribution for that tax year. Just having assets in a SEP-IRA from prior years or just having a SEP-IRA set up will not by themselves qualify as being covered by a work retirement plan in the current tax year.

https://www.irs.gov/retirement-plans/ar ... ement-plan
I think this is pretty definitive. If I dont contribute to my SEP-IRA in 2022 tax year, then I am not "covered" by the plan this year and subject to the MAGI limitations for deductibility.

However, I realize that my spouses plan reinstates limits, albeit higher, so in the end I am out of luck to deduct a Traditional IRA this year. So I am back to the SEP IRA.
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MP123
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by MP123 »

boglebill2015 wrote: Fri Jan 27, 2023 4:19 pm However, I realize that my spouses plan reinstates limits, albeit higher, so in the end I am out of luck to deduct a Traditional IRA this year. So I am back to the SEP IRA.
If you're stuck with the SEP contribution then note that it's 20% (not 25%) of (net business income - 1/2 self employment tax) assuming you're a sole proprietor. So a bit less than in your original post.
Northern Flicker
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by Northern Flicker »

boglebill2015 wrote: Fri Jan 27, 2023 4:19 pm
Northern Flicker wrote: Fri Jan 27, 2023 2:18 pm To answer the OP's question, my understanding is that what makes a SEP-IRA qualify as being covered by a work retirement plan in a given tax year is making a SEP-IRA contribution for that tax year. Just having assets in a SEP-IRA from prior years or just having a SEP-IRA set up will not by themselves qualify as being covered by a work retirement plan in the current tax year.

https://www.irs.gov/retirement-plans/ar ... ement-plan
I think this is pretty definitive. If I dont contribute to my SEP-IRA in 2022 tax year, then I am not "covered" by the plan this year and subject to the MAGI limitations for deductibility.

However, I realize that my spouses plan reinstates limits, albeit higher, so in the end I am out of luck to deduct a Traditional IRA this year. So I am back to the SEP IRA.
That may not be true:

https://www.irs.gov/retirement-plans/20 ... an-at-work
jb10
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Re: SEP- IRA vs Traditional - can I choose which to use this year?

Post by jb10 »

However, I realize that my spouses plan reinstates limits, albeit higher, so in the end I am out of luck to deduct a Traditional IRA this year. So I am back to the SEP IRA.
True, if you've earned too much. But . . .

Your spouse has different limits than you, determined if they are covered or not and how much is earned. Northern Flicker is correct. This IRS page https://www.irs.gov/retirement-plans/ir ... ion-limits directs you to the answer about which limit applies, whether YOU are, or are not, covered.

This thread is from last year, but it's tax season, and I'm sure others with 1099 income may miss out on tax-deductible contributions.

It's possible to sock away quite a bit.

If one of you is covered and has a good plan, that one could possibly defer up to 66,000 under that plan. Then, if MAGI filing jointly for the year is less than 116000, they one can deduct another 6,500, (7,500 if over 50) to a tIRA, and if there is a 1099 side hussle, the over 50 spouse could deduct up to 7,500 for that. Then, deduct SEP contributions up to 20% of 1099 income. This could potentially bring deductions to nearly 100,000.

Correct me if I'm wrong.
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