Self-Employed Retirement Plan

Question: I am 60 years old and self-employed with an annual adjusted gross income of $90,000.  Can I contribute to a both a Roth IRA and a SEP IRA and if so, how do I figure the amounts.  Does one affect the other?

Answer:  You qualify to contribute to both.  Self-employed taxpayers can certainly have a SEP IRA, which can be a suitable pension plan for small businesses and self-employed individuals like yourself.  You can contribute 20% of your net self-employment income up to a maximum of $53,000 for tax year 2016.

Single taxpayers with adjusted income under $132,000 (the contribution amount is phased out between $117,000 and $132,000) can contribute to a Roth IRA, even if they are participants in an employee sponsored retirement plan or a self-employed pension plan like a SEP IRA.  Married taxpayers can contribute to a Roth IRA if their adjusted gross income is under $194,000 (the contribution amount is phased out between $184,000 and $194,000).  The maximum contribution to a Roth IRA for 2016 is $5,500 if you are under 50 and $6,500 if you are 50 or older.

The deadlines for making contributions are different for the SEP IRA and the Roth IRA.  You can still contribute to a SEP IRA for last year’s tax return up until October 17th this year if you filed and extension to file your return before April 15th.  It’s too late to make a Roth IRA contribution for last year, but you can make one for 2016 up until April 17th, 2017.

At your level of income, if you want to maximize your pension contribution and reduce your current income tax burden, you should consider switching from a SEP to an individual 401(k) retirement plan.  This plan allows you to contribute $24,000 to a 401k ($18,000 plus a $6,000 catch-up for being older than 49) plus 20% of your net self-employment income to a profit-sharing plan. 

Question:  I work part-time for a state school.  Every year, I contribute the maximum amount allowed to an IRA account.  I do not get benefits from my job at the school, but each year part of my wages are deposited into a state retirement account.  Does this mean that I have been depositing more than I should be into my IRA account each year?

Answer:  No.  You can contribute the maximum each year to a traditional IRA account as long as you have that much or more earned income.  Since the college is sending part of your paycheck to the state retirement plan, you are considered to be a participant.  As a participant you can contribute to a traditional IRA and deduct your contribution on your tax return if your income level is below a certain “phase-out” level.  For single taxpayers the phase out is between $61,000 and $71,000 of adjusted gross income.  If you are married, the deduction phase-out varies depending on the participant status of your spouse. If you don’t absolutely need the IRA deduction on your tax return, consider contributing to a Roth IRA.  The contribution limits are the same as the traditional, but the phase-out ranges are much higher.

 

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to ken@montereypw.com.