SEP IRA and ROTH IRA

[cspyon]

Hi

I'm a 62-year-old self-employed man, and I have a SEP IRA account.

Early this year I contributed $8,000 to my ROTH IRA without thinking about tax deductions. 

Can I still contribute to the SEP IRA for tax deductions or have I already maxed out my contributions for this year? If I can't, any other tax deductable contributions? 

[dmertz]

The contribution limit for the SEP IRA contribution is largely independent of the contribution limit for the Roth IRA.  The only interaction is that the contribution to the SEP IRA reduces the compensation available to contribute to the Roth IRA.  As long as net profit exceeds the sum of the deductible portion of self-employment taxes, the permissible SEP IRA contribution and the Roth IRA contribution, the contribution to one does not limit the contribution to the other.  $10,760 of net profit would be sufficient to maximize both the SEP IRA contribution and the Roth IRA contribution.  With less net profit than that you would have to limit your SEP IRA contribution to less than maximum permissible 20% of net earnings to avoid a portion of your $8,000 Roth IRA contribution being an excess contribution.  Net earnings are net profit minus the deductible portion of self-employment taxes.  With $10,760 of net profit from self employment, $760 would generally be the deductible portion of self-employment taxes, leaving $10,000 to be split between the maximum $2,000 SEP contribution and the $8,000 Roth IRA contribution.

[cspyon]

I don't understand your explanation clearly, "Net earnings are net profit minus the deductible portion of self-employment taxes."

For example, I'm expected to make around $30,000 as a self-employed translator this year. How would that fit into your explanation? 

[dmertz]

With $30,000 of net profit from self employment (and no W-2 compensation that would cause your SE tax to be limited and your SE tax to be less), SE tax would be $4,238.  Half of that, $2,119, would be the deducible portion of SE tax, leaving $27,881 as net earnings.  The maximum SEP contribution would then be 20% of $27,881 which is $5,576, leaving $22,305 of compensation to support the $8,000 Roth IRA contribution.

[cspyon]

So, based on your calculations, can I still contribute to my SEP IRA account?  If so, how much?

[cspyon]

Reading your reply again, I see I can contribute $5,576 to my SEP IRA, even though I already contributed $8000 to mt ROTH IRA account. Am I correct? 

[dmertz · Accepted solution]

My previous reply answered that question with regard to net profit of exactly $30,000.  However, until you know your exact net profit for 2024 you won't be able to determine the exact maximum SEP contribution for 2024.

1. Net profit will determine your SE tax.
2. Net earnings will be net profit minus half of SE tax.
3. The maximum SEP contribution will be 20% of net earnings.

With net profit in the range of $30,000, the amount that you contribute to the SEP IRA has no effect on the amount that you are eligible to contribute to the Roth IRA and vice versa.  The contribution limits are independent of each other.

[cspyon]

Thanks for your kind reply.

So, I can still make the tax-deductable contribution (20% of my net earnings) to my SEP IRA account, in addition to my contribution of $8,000 to ROTH IRA, right? That's what I want to know. 

[cspyon]

Got it! I found the answer in your reply, "The contribution limits are independent of each other."