SEP IRA Contribution with Post Tax Contribution?

[separate899]

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? 

[dmertz]

"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.

[separate899]

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]

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.

[separate899]

Sorry just to make sure!  The money I’m taking out to contribute to the SEP IRA this year is money I previously earned 5+ years ago that I had paid ordinary income taxes on. So if I’ve already paid taxes, and then I will pay taxes in the future on the same money, wouldn’t that be double taxation?  

Or is it that I’m swapping my old taxed money for non taxed money because of the deduction I can take this year?

[fanfare]

your SEP contribution must be funded by Schedule C net income in the same tax year.

You can't look back for income from five years ago.

@separate899 

[separate899]

I just realized that my question is moot to begin with since the same stock sales could have been used toward expenses and my income could have been reserved for contribution. 

[NCperson]

@separate899 how can legal fees from a divorce impact your income?????? isn't that a personal expense???? 

[separate899]

I mistakenly mixed income with expenses and I no longer have the issue I thought. Per my previous note, we can close my thread.