SEP IRA maximize?

[mgbtax]

Hello all,

I have a small sole proprietorship in addition to my regular employment.  No employees it is just me.  In Turbo Tax I see where I put in the amount I contributed to it for 2019.  But to the right there is a Maximize check box.  If I check the box it it changes my return by a few hundred dollars.  But I am not sure if I should and dont want to do anything wrong.  Can anyone explain why that option is there and what any ramifications are?

Thanks

Mike

[Bsch4477]

The maximizer calculates the most you are allowed to contribute based on your input.  You can choose to contribute less if you want but can’t contribute more. 

[ColeenD3]

This is a button that allows TurboTax to calculated the amount you can deposit based on your income.

Before you enter your SEP IRA contributions, first make sure you've entered self-employed income. This allows us to calculate the maximum amount you're allowed to contribute to your SEP IRA.

Once your self-employment income is entered:

1. In your return, type SEP IRA contributions (use the whole phrase) in the Search box.
2. Select the Jump to link at the top of the search results.
3. This will take you to the Self-Employed Retirement Plans screen.
   • If you get a message that Self-Employed Retirement Plans are only for self-employed individuals, this means that you have not entered any self-employed income.
4. TurboTax will ask you about whether you contributed to different types of retirement plans. Select Yes to Keogh, SEP and SIMPLE Contributions.
5. On the Your Contributions screen, you’ll be able to input your SEP IRA contributions

 

[mgbtax]

So since I was only able to put in $500 last year towards it, do I put in the $500 and also check the box?  That's the part I dont get.   It just seems to me that it gives me to much money back on my return considering I only out $500 in.

thanks for the response

[AmyC]

The maximize button is checked the first time to give you the numbers allowed. It is not checked the second time through, you will want to use your actual numbers.  You can play with the numbers and see that if you try to enter what it says or more, you get errors.

[mgbtax]

thanks for the responses.  I probably just better leave the maximize button unchecked.  It was not checked the first time I went through it though.  I've tried everyone suggestions and I appreciate it .  But I am not gonna risk getting in trouble on my return over a difference of $300 considering I only put  $450 into it last year.   Checking the maximize button seems like trouble waiting to happen.  

thanks anyway

[ethan1]

Hi, I'm using TurboTax Home & Business 2019.  I am self-employed with no employees and have entered my self-employment income.  After deducting expenses, self-employment income shows up as $42,671.  Last year I contributed $10,000 to my SEP, thinking this would fit within the 25% contribution limits.  But when I click "maximize" to calculate the max. SEP contribution limits when completing my return in TurboTax, I'm told that $7931 is the max. I was able to contribute and that I need to remove the additional amount from my SEP in order to stay within the limits and avoid penalty.  Anyone know why the max is lower than 25% of my income?  Thanks in advance. 

[DaveF1006]

For self-employed people, that rate is actually 20%. In researching this, I found a helpful IRS link that you should be very interested in.  Pay particular attention to a worksheet entitled Deduction Worksheet for Self-Employed.  Here it instructs you to enter your deduction for your self employment tax. Your deduction that is listed as an adjustment to income is listed in Schedule ! of your return and is 1/2 of your actual Self-employment tax imposed on your net earnings.

Now to determine S/E tax you do the following: Keep in mind, these may not be exact amounts but will be close.

1. Take ($42671)(.9235)(.153)= $6029   
2. 1/2 of this amount is $3015
3. ($42671 -3015)(.2) =$7931   That is the maximum you can contribute this year.

[ethan1]

Thanks for the very helpful, clear and quick response.  When I made my SEP contribution several months ago, I was figuring with the 25% figure and put in $10,000 thinking I'd be safe.  On realizing I invested too much, any idea how I would go about "un-investing" the $2,069 overage ([social security number removed]=2069)?  It seems the IRS might not like me just removing that amount alone, as there will have been some appreciation on the money too.  Thanks.

[ThomasM125]

You need to take the excess contribution out by the due date of the tax return to avoid paying a penalty. Then, change the SEP contribution for the tax year to reflect the corrected contribution.

The income you earned should be minimal, but it does need to be reported. You can do that when you report the distribution that will be reported to you on form 1099-R in the year you received the excess contribution back.

[ethan1]

Thanks very much.

[evanauken]

I am looking to have the SEP IRA maximized (which should be 25% of earnings)   However the system does not maximize it at 25%.  When it calculates it I only see it at 18%   Why does turbo tax not maximize based on the IRS rules?

Also if I selected personal 401K it allows me tons more.  I am not sure why that is either.   I have to make a choice at the end of the year and I need to have someone explain why the maximizer does not work correctly

[ThomasM125]

@evenauken A SEP-IRA will allow up to 25% of your self-employment income to be contributed, but your self-employment tax is deducted from your net income to arrive at your net self-employment income. So, you're probably assuming your net employment income is more than what is allowed to arrive at the 25% number you calculate.

An individual 401-K plan allows you a salary deferral of up to $19,500 (more if over 50) in addition to the 25% of income allowed by a SEP. So, the allowed deduction for a 401-K can  be much more that a SEP.

[Bsch4477]

The contribution limit for self-employed persons is more complicated; barring limits, it is 18.587045% (approximately 18.6%) of net profit. The computation is in IRS Pub 560, section 5, Table and Worksheets for the Self-Employed, specifically Deduction Worksheet for Self-Employed.^[3]

[evanauken]

Unfortunately What your describing does not actually work in Turbo tax.  I only see an 18% allowable contribution on a SEP IRA (Based on not gross but rather net pay after taxes and all business expenses are deducted.   Thus it is not working correctly as it should be 25%

As for Individual 401K I do understand that and I plan to look into that instead,  however I am concerned that Turbp does not correctly calculate that either.