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SuperDave303
New Member

SEP IRA

Last year we paid for the level of tax service that gets us CPA level tax advice. 

I'm a CPA but I don't keep up with taxes. I'm a mortgage guy.

So I know enough to be dangerous. 

I tried to google this issue but can't find a reliable answer. 

QUESTION: 

background first: my wife and I are both self employed.

we're married filing jointly. no dependents. no other special tax considerations. 

we own our own separate companies. 

both S corps. we each own 100% of our own company.

the scenario is for 2020 and 2021; but if you have to base it on 2019 I'm ok with that. I'm trying to get a rough idea for planning purposes. 

Assume my business will profit $500k before wages. 

Geneva's business will profit $250k before wages. 

each company has only ourselves as an employee- ie., one employee/owner company.

we are not otherwise employed. 

Can we each set up a SEP IRA or are we restricted by an overlapping rule/stop gap? 

How much can we contribute? 

Dave (me) I'm age 54, Geneva - spouse - is age 47. 

I understand I can contribute up to 25% of wages paid up to $60,000 for Dave (catchup provision) . 

does this assume I have to pay myself W2 wages of $240,000 to be able to save $60,000? 

eg., if I only pay myself wages of $200k I can only put max of $50k in my SEP? 

Can I pay myself wages of $100k, company profit (after wages) of $300k and still contribute $60k to the SEP? - you know... to avoid unnecessary payroll taxes? 

 

What about Geneva? If I pay myself $240k wages and pay $60 of that to my SEP, what can she save for retirement? 

 

Thank you. 

If it's easier, faster to call me to discuss; please do so. [phone number removed]

David[last name removed]

Geneva [last name removed]

 

2 Replies
JulieS
Employee Tax Expert

SEP IRA

Yes, both of you can open a SEP-IRA for yourselves and the plans are based on your individual wages. 

 

The contributions you make to each employee's SEP-IRA each year cannot exceed the lesser of:

  • 25% of compensation, or
  • $56,000 for 2019
  • $57,000 for 2020 

Future year limits will be adjusted for inflation. 

 

SEP plans do not allow for catch up contributions, but some SEP-IRA plans do

 

If your SEP-IRA permits non-SEP contributions, you can make regular IRA contributions (including IRA catch-up contributions if you are age 50 and older) to your SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that you can deduct on your income tax return will be $0 due to your participation in the SEP plan and your total income.

 

As you can see the there are a lot of factors to consider with these plans. Depending on the rules of the plan, which you would have to discuss with your plan administrator, you may be able to contribute more than the maximum, but part of your contribution would not be deductible.

 

Turbo Tax has an excellent section on employee retirement plans which is easy to use for planning.

  1. Just use the search box in the upper right corner and search for "SEP account".
  2. Click on the Jump to link.
  3. Check the "Maximize my deduction" box and the program will calculate your maximum contribution and deduction based on the information in your return. 

 

If you use the section for planning, be sure to delete or correct you entries before you file your return. 

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dmertz
Level 15

SEP IRA

If neither participates in or owns any part of the other's business, the attribution rules that would otherwise result in these businesses being treated as a controlled group that would have to be treated as a single employer for the purpose of a retirement plan do not apply.  Each can set up a separate SEP plan (and, cannot set up a combined SEP plan).

 

The maximum contribution is 25% of wages paid (but not to exceed the maximum limit for the year, $57,000 for 2020 which would require at least $228,000 of wages paid).  Your pass-through income is not wages and does not factor into the calculation of your permissible SEP contribution (although the SEP contribution made by your S corp and deducted on the S corp's tax return does reduce the pass-through income).  Catch-up contributions are not permitted in a SEP plan.  SEP contributions are employer contributions, not employee contributions.

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