topic Thanks for the important clarification in Retirement tax questions

Sole Proprietor SEP IRA Documentation

treese — Sat, 01 Jun 2019 08:30:33 GMT

I'm a sole proprietor who claims no business expenses (consultant who works from home) so my net business income is just the sum of all my 1099-MISC's. If I want to create an SEP IRA for tax year 2016, does the contribution need to come from a solely business account? Or as a sole proprietor who made $45,000 am I simply eligible to make an SEP IRA contribution equal to 20% of that salary (i.e. $9000)? I'm married filing jointly and we're trying to reduce our taxable income for 2016 at the last minute, but if I need to clearly delineate the contribution as an "employer contribution to SEP IRA from a business account" it seems like a SIMPLE IRA may be simpler way to reduce our taxable income at my level of income, right?

Since it is after December 31, 2016, a SIMPLE IRA deducti...

AmyT — Sat, 01 Jun 2019 08:30:34 GMT

Since it is after December 31, 2016, a SIMPLE IRA deduction is not available to you for 2016 - this type of account needs to be established and contributed to during the tax year to which the deduction would apply.

You are able to open a SEP and contribute to it until April 18, 2017, to reduce your 2016 tax liability. You can then (at the same time, if you wish), establish a SIMPLE plan for 2017.

You should consult with your financial institution about whether they will require you to use a business account to fund the plan, or if you can use a personal account.

SEP is the simplest way to go. Administrative overhead :...

fanfare — Sat, 01 Jun 2019 08:30:35 GMT

SEP is the simplest way to go. Administrative overhead : none.

As far as the tax code is concerned, it doesn't matter wh...

dmertz — Sat, 01 Jun 2019 08:30:36 GMT

As far as the tax code is concerned, it doesn't matter what account the money comes from. As sole proprietor, it's all your own money no matter what account it is in, so there is no reason for the SEP-IRA custodian to care. Their only responsibility is to report the contribution on Form 5498 as a SEP contribution, which they will do by default when your IRA account is marked in their system as a SEP-IRA account.

The custodian generally has no involvement in you setting up your SEP plan itself since most simply rely on you to establish the plan yourself by preparing Form 5305-SEP and keeping it in your personal tax files.

Good points, thanks for the help!

treese — Sat, 01 Jun 2019 08:30:38 GMT

Good points, thanks for the help!

And just as a side note, you can't contribute 20% of your...

Zbucklyo — Sat, 01 Jun 2019 08:30:41 GMT

And just as a side note, you can't contribute 20% of your net income to the SEP - the amount is actually about 18.59%. Make sure you determine the actual maximum before you make your contribution.

https://en.wikipedia.org/wiki/SEP-IRA#Contribution_limits

Thanks for the important clarification

treese — Sat, 01 Jun 2019 08:30:43 GMT

Thanks for the important clarification