Author Topic: SEP-IRA for a side hustle  (Read 1102 times)

clayreed

  • 5 O'Clock Shadow
  • *
  • Posts: 4
SEP-IRA for a side hustle
« on: September 04, 2017, 01:13:33 PM »
For most of my income, I am a W-2 worker. From this, I expect to earn about $78-$79K this year.

However, I also receive a smaller amount of 1099 income from a tutoring side hustle on Wyzant. An optimistic estimate says about $3,000, though it could be significantly less, and it could even possibly be slightly more.

I max out my 401k, tIRA and HSA. However, I am having trouble seeing anything that stops me from also opening SEP-IRA for the 1099 income and contributing any maximum to that.

So the first question is, am I correct? According to these numbers, and my situation, is my confidence that I can do this justified?

The other question is. I am having some trouble understanding the max contributions to the SEP-IRA. Here's what I gather so far:

+ Since I'm a self-employed, independent contractor, the percentage of income it's capped at is 20% of income, not 25% of income
+ Since 2{5,0}% of my income does not exceed $54,000, my contributions are capped at a percentage of income
+ When I say income in this case, it's not gross income, but net income, which means I remove self-employment tax first

This is where I get a little stuck. I'm not quite clear on how much self-employment tax is, and how or wether my W-2 income relates to it. How do I calculate it in my case?

I'm also curious as to your opinion on. I see this would likely amount to a couple hundred dollars in the SEP-IRA this year. In reference to this fact, am I being unreasonable in going through the trouble? Why or why not? 

SeattleCPA

  • Pencil Stache
  • ****
  • Posts: 819
  • Age: 57
  • Location: Redmond, WA
    • Evergreen Small Business
Re: SEP-IRA for a side hustle
« Reply #1 on: September 04, 2017, 02:11:15 PM »
You can do a SEP. You're right... it's basically going to be 20%-ish of your SE earnings.
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan

MMbergmann

  • 5 O'Clock Shadow
  • *
  • Posts: 21
Re: SEP-IRA for a side hustle
« Reply #2 on: September 04, 2017, 04:43:54 PM »
I personally would just put it in a taxable account for all that trouble. You would maybe save 50 dollars. And there could be costs to set it up. It may even cost you more than you would save. So yes, it sounds unreasonable.

cchrissyy

  • Bristles
  • ***
  • Posts: 436
  • Location: SF Bay Area
Re: SEP-IRA for a side hustle
« Reply #3 on: September 04, 2017, 07:54:05 PM »
you're right you can do it. the existing accounts don't limit your ability at all.
but we are only talking about a small amount of money, as the % you are allowed to contribute is only from your self-employed income.
and no, there won't be costs to set this up or maintain the account.
I just did the same thing (Schwab).

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 3909
  • Age: 33
  • Location: Seattle, WA
Re: SEP-IRA for a side hustle
« Reply #4 on: September 05, 2017, 03:37:14 PM »
I have some side income in a similar amount. I use a SEP-IRA with Vanguard. It was real easy to set up and there are no extra fees. It is only a few hundred dollars per year, true, but I like to defer taxes on as much income as possible regardless of amount.

Do be aware that money in a SEP IRA counts toward the Roth conversion pro-rata rule. You may not wish to do this if you are currently making backdoor Roth IRA contributions or plan to do so in the future.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

dandarc

  • Magnum Stache
  • ******
  • Posts: 2971
  • Age: 35
Re: SEP-IRA for a side hustle
« Reply #5 on: September 05, 2017, 03:46:53 PM »
I put in 18.5% during the year, then a much smaller amount in January to get to the exact maximum that TurboTax tells me.  That's for an individual 401K - guessing most tax software handles a SEP-IRA as well.

SEP-IRA calculation goes like this at your income:

1.  Schedule C Net Income = $3,000
2.  Take 92.35% of 1 - this is the amount subject to SE tax - $2,770.50
3.  Take 15.3% of 2 - this is your SE tax - $423.88
4.  Take 1/2 of 3 - $211.94
5.  Subtract 4 from 1 - this is your "net self employment income" for SEP-IRA purposes - $2788.06
6.  Multiply 5 by 20% - this your maximum SEP-IRA contribution - $557.62

I think the IRS has you round to the nearest dollar at the end, but that's the gist of it.

Note that your maximum SEP-IRA contribution (step 6) is 18.58% of your Schedule C Net Income (Step 1).  This is where my 18.5% as the money comes in figure comes from.  In your case, this is a pretty good estimate - you're not over the Social Security Income limit, so you don't have that to factor.
« Last Edit: September 05, 2017, 03:48:43 PM by dandarc »

clayreed

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: SEP-IRA for a side hustle
« Reply #6 on: September 10, 2017, 01:20:24 PM »
I have some side income in a similar amount. I use a SEP-IRA with Vanguard. It was real easy to set up and there are no extra fees.

When I go to open the SEP-IRA with Vanguard, it would appear as if, even tho I already have an tIRA with them, they ask me to give name, employment, etc, information again. When I signed up for the tIRA, I gave my W-2 employer and job title. Do I now give my side hustle "name and title"? Will it matter?

]
Do be aware that money in a SEP IRA counts toward the Roth conversion pro-rata rule. You may not wish to do this if you are currently making backdoor Roth IRA contributions or plan to do so in the future.

What is a "backdoor Roth IRA"? Is it different from a Roth conversion ladder?

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 3909
  • Age: 33
  • Location: Seattle, WA
Re: SEP-IRA for a side hustle
« Reply #7 on: September 11, 2017, 12:36:00 PM »
I have some side income in a similar amount. I use a SEP-IRA with Vanguard. It was real easy to set up and there are no extra fees.

When I go to open the SEP-IRA with Vanguard, it would appear as if, even tho I already have an tIRA with them, they ask me to give name, employment, etc, information again. When I signed up for the tIRA, I gave my W-2 employer and job title. Do I now give my side hustle "name and title"? Will it matter?

If you do business under a separate name to generate this side income, you might as well put that down. If not, your personal name should be fine.

Quote
]
Do be aware that money in a SEP IRA counts toward the Roth conversion pro-rata rule. You may not wish to do this if you are currently making backdoor Roth IRA contributions or plan to do so in the future.

What is a "backdoor Roth IRA"? Is it different from a Roth conversion ladder?

A "backdoor Roth IRA" is where you contribute post-tax dollars to a traditional IRA and then immediately roll it over to a Roth IRA. This is generally only useful if your income is too high to contribute directly to a Roth IRA. See this Bogleheads page for more info.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

Snowman99

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: SEP-IRA for a side hustle
« Reply #8 on: September 12, 2017, 08:09:31 AM »
I just posted a similar thread to this, as I have similar questions:

Here's our situation.  I am a W-2 employee making approx $120-130k/year.  My wife stays home, but runs a home business that nets barely a few hundred dollars a year.  We file jointly.

I also run a side hustle that may make about $10k this year, and may grow after that.

Presently, I max out the 401k contribution at work and on top of that contribute the maximum to Roth IRA for both myself and my spouse.  This allows us to stash away $29k a year ($18k for 401k, $5.5k each for Roth IRA) in tax advantaged accounts.

I have three questions:

(1) Is it possible to use my income as a basis to stash away funds in a SEP-IRA set up for my spouse?  I ask because the SEP-IRA has certain limits based on income earned by the business.  My wife's business does not earn that much, but I do, and I was wondering if we could use my income to define the contribution limits since we file jointly.

(2) Is it possible for me to set up a SEP-IRA for my side hustle?

(3) Would I be able to set up these SEP-IRA funds IN ADDITION TO our existing contributions to my 401k and our Roth IRAs?  Or, in other words, would these SEP-IRAs eclipse our present situation?

Wondering if anyone knows the answers to these questions.  Thanks.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 3909
  • Age: 33
  • Location: Seattle, WA
Re: SEP-IRA for a side hustle
« Reply #9 on: September 12, 2017, 11:23:30 AM »
I just posted a similar thread to this, as I have similar questions:

Here's our situation.  I am a W-2 employee making approx $120-130k/year.  My wife stays home, but runs a home business that nets barely a few hundred dollars a year.  We file jointly.

I also run a side hustle that may make about $10k this year, and may grow after that.

Presently, I max out the 401k contribution at work and on top of that contribute the maximum to Roth IRA for both myself and my spouse.  This allows us to stash away $29k a year ($18k for 401k, $5.5k each for Roth IRA) in tax advantaged accounts.

I have three questions:

(1) Is it possible to use my income as a basis to stash away funds in a SEP-IRA set up for my spouse?  I ask because the SEP-IRA has certain limits based on income earned by the business.  My wife's business does not earn that much, but I do, and I was wondering if we could use my income to define the contribution limits since we file jointly.

If you're the only one doing the work, I don't think you can put the money in a SEP-IRA in her name. If she's a legitimate contributor to the business then you could. If that's the case, you might talk to an accountant to see what the rules are regarding how you can split the income between the two of you. With a SEP it shouldn't matter how you split it, the contribution amounts should be basically the same whoever gets the income. If anything, you would be able to contribute a bit more to a SEP in your own name if your main job already puts you over the social security wage cap, as there would be less self-employment tax to pay before calculating your contribution amount.

However if you are able to legitimately claim that the income belongs to your wife, you might want to look into a 401(k) rather than a SEP-IRA. The 401(k) would allow for 100% of her first $18k to be sheltered, while the SEP would only allow for a fraction of that.

Quote
(2) Is it possible for me to set up a SEP-IRA for my side hustle?

Yes, absolutely.

Quote
(3) Would I be able to set up these SEP-IRA funds IN ADDITION TO our existing contributions to my 401k and our Roth IRAs?  Or, in other words, would these SEP-IRAs eclipse our present situation?

Yes, absolutely. The SEP is in addition to the 401(k) at your main job and your other IRAs.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.