SEP IRA Contribution with Post Tax Contribution?

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I'm self-employed and had enough income to contribute to the max limit for SEP IRA contributions this year, 2022. However, I spent all of my earnings on legal fees for a divorce. I would still like to contribute to a SEP IRA, but using stock sales from investments that was previously income taxed at ordinary rates in the past. I'm not sure if I know how to think about this, but from my understanding SEP IRA contributions should be pre-tax; however, I only have post-tax funds to contribute to the SEP IRA... Does contributing to the SEP IRA effectively create a deduction from income such that the stock sales would be treated as "pre-tax" contributions?

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dmertz

Level 15

"Does contributing to the SEP IRA effectively create a deduction from income such that the stock sales would be treated as "pre-tax" contributions?"

Yes. When you make a SEP contribution as self-employed, the contribution appears on Schedule 1 line 16 as an above-the-line deduction. This deduction makes the contribution pre-tax. Of course any SEP contribution that exceeds the maximum permissible contribution is not deductible and is subject to penalty.

separate899Author

Level 3

Thank you for your reply. I have a follow up for further clarification. If I contribute previously taxed funds into the SEP IRA and then it’s treated as pre-tax earnings, aren’t I effectively getting double taxed on that same amount?

So previously taxed goes in as pre tax and then in the future I’m taxed again?

dmertz

Level 15

You aren't taxed on the money originally contributed because the amount contributed was excluded from taxable income via the tax deduction on Schedule 1 line 16. This money only gets taxed when eventually distributed from the IRA.