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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: CabinetGuy on April 10, 2015, 04:04:07 AM

Title: My accountant really wants to keep me from putting money into my SEP IRA
Post by: CabinetGuy on April 10, 2015, 04:04:07 AM
I've colied the email from my accountant:

"You will receive a refund on your Federal of $44 and owe on your State return $1,080. If you made a $5,500 deductible IRA contribution by April 15th,  you will receive a refund on your Federal of $975 and owe on your State $695. However, I would not contribute more than $911 to a deductible IRA. If you want to contribute more for your retirement in 2014, the remainder I would contribute to a non-deductible Roth account. When you get a chance, you can call me and we can discuss."
 

I sort of understand the fact that if I take the hit now by putting money into a Roth, I'm helping my future self out.  But damn, that's a pretty big swing if I only put 5500.00 into my SEP. 

Thoughts?  (I haven't called him yet, I just got the email late last night)

Jon
Title: Re: My accountant really wants to keep me from putting money into my SEP IRA
Post by: tarheeldan on April 10, 2015, 04:27:22 AM
1. Is it the case that your income is in the phaseout region for Trad IRA deductibility? That might be why.

2. Trad vs Roth is also about your expectations for tax rates (and income) when you retire.
Title: Re: My accountant really wants to keep me from putting money into my SEP IRA
Post by: CabinetGuy on April 10, 2015, 05:30:34 AM
What does #1 mean?  Yes, the ignorance, it hurts.

Thank you.  Trying to learn...

Jon
Title: Re: My accountant really wants to keep me from putting money into my SEP IRA
Post by: kendallf on April 10, 2015, 06:16:41 AM
What does #1 mean?  Yes, the ignorance, it hurts.

Thank you.  Trying to learn...

Jon

If you're covered by a 401(k) elsewhere, there's a phase out of the tax deductibility for the IRA contribution according to your Modified Adjusted Gross Income.  See this link:

http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

If you're contributing to a SEP-IRA and aren't employed elsewhere, this won't apply.  Also, it looks like you're in the ~15 percent bracket (the Federal tax difference he computed is 17%) so your income should be well below that limit anyway.

Basically, the choice comes down to whether you think you'll be earning much more (and thus in a higher tax bracket) during retirement.  If so, pick the Roth.  If not, pick the traditional.  The traditional IRA comes out ahead in most circumstances for frugal retirees because there are several ways to funnel money from it into a Roth IRA later while paying no or low taxes.  See this article and others by the MadFientist for more:

http://www.madfientist.com/traditional-ira-vs-roth-ira/
Title: Re: My accountant really wants to keep me from putting money into my SEP IRA
Post by: Diamondpick on April 10, 2015, 06:19:41 AM
I would love to hear more of the mustache principles here. I quit putting into the sep, Roth and for sure the traditional. This product seems to be pushed hard especially lately. To me the broke government is pushing a product to help you retire safely. The golden compound interest, 7 year double and safety I have not seen or experienced. I was a diligent soldier from 19 to 38 putting in regularly, then putting in large sums from 38-41. I then stopped because I have the same if not less than I have put in...and definitely not compounding interest. Yep went through the bust...but still not up to great levels in the return. There are fees too for the managers.

I believe the product will be much like social security was sold to my fathers generation and much if not most of that money will be held, postponed for you to use or taken by the government by the time we get to use it. Get to use our own money...but not until you are 72, or later as time passes. It does on the other hand give a place to save.

I now put that money other places but keep money there to have as a emergency backup.
Title: Re: My accountant really wants to keep me from putting money into my SEP IRA
Post by: Baron235 on April 10, 2015, 06:31:45 AM
I would love to hear more of the mustache principles here. I quit putting into the sep, Roth and for sure the traditional. This product seems to be pushed hard especially lately. To me the broke government is pushing a product to help you retire safely. The golden compound interest, 7 year double and safety I have not seen or experienced. I was a diligent soldier from 19 to 38 putting in regularly, then putting in large sums from 38-41. I then stopped because I have the same if not less than I have put in...and definitely not compounding interest. Yep went through the bust...but still not up to great levels in the return. There are fees too for the managers.

I believe the product will be much like social security was sold to my fathers generation and much if not most of that money will be held, postponed for you to use or taken by the government by the time we get to use it. Get to use our own money...but not until you are 72, or later as time passes. It does on the other hand give a place to save.

I now put that money other places but keep money there to have as a emergency backup.
IRAs are just accounts with tax advantages.  The actual funds you invest in can be the same as your nontax advantaged brokerage account.  So if you haven't had the returns you thought it would be because of the funds you chose.  If you had done a generic stock market index fund, you would have had a great return, assuming you left it in the whole time.
Title: Re: My accountant really wants to keep me from putting money into my SEP IRA
Post by: Diamondpick on April 10, 2015, 06:27:20 PM
I have taken over the control of choosing my investments. One huge difference however is WHEN you can withdraw your money without penalty. Is the tax shelter worth it?
Thx
Title: Re: My accountant really wants to keep me from putting money into my SEP IRA
Post by: Eric on April 10, 2015, 06:33:57 PM
I have taken over the control of choosing my investments. One huge difference however is WHEN you can withdraw your money without penalty. Is the tax shelter worth it?
Thx

Only if you want more money.  Read the Mad FIentist link above.
Title: Re: My accountant really wants to keep me from putting money into my SEP IRA
Post by: Dodge on April 10, 2015, 06:50:49 PM
If you do it right, you'll end up getting the deductible, and still paying 0 taxes on withdrawals when you retire early. Read the MadFientist link.
Title: Re: My accountant really wants to keep me from putting money into my SEP IRA
Post by: CabinetGuy on April 11, 2015, 05:23:46 AM
Guys, thanks so much.  Turns out he's just really biased against traditional IRA's.  He kept asking me "Whst if you need to access this money in the next couple of years?"  Told him point blank "If I need to access this 5500.00 in next couple of years, I'm doing something really wrong."  But "you'll pay a penalty for early withdrawal..."  Yeah, again, ain't gonna happen.  I've done it before when I was terrible with money and had no savings.  Won't happen again.

5500.00 check sent, now I just need to find more ways to shelter more money...


Thanks again.
Title: Re: My accountant really wants to keep me from putting money into my SEP IRA
Post by: TheFixer on April 11, 2015, 07:58:27 AM
<<He kept asking me "Whst if you need to access this money in the next couple of years?"  Told him point blank "If I need to access this 5500.00 in next couple of years, I'm doing something really wrong."  But "you'll pay a penalty for early withdrawal..." >>

So what?  Even if the accountholder screws up and NEEDS that money, he can get it out.  And pay capital gains tax (which is good, it means there were gains) and pays a 10% penalty.  If the money is invested for just 2 years w/ a return of 7%, then the 10% penalty is still less than the interest.  Savings accounts pay .1% today, so stashing money in IRA as a "emergency savings account" is probably gonna work out just fine.

That's my .02 centavos...
Title: Re: My accountant really wants to keep me from putting money into my SEP IRA
Post by: Eric on April 11, 2015, 11:08:41 AM
<<He kept asking me "Whst if you need to access this money in the next couple of years?"  Told him point blank "If I need to access this 5500.00 in next couple of years, I'm doing something really wrong."  But "you'll pay a penalty for early withdrawal..." >>

So what?  Even if the accountholder screws up and NEEDS that money, he can get it out.  And pay capital gains tax (which is good, it means there were gains) and pays a 10% penalty.  If the money is invested for just 2 years w/ a return of 7%, then the 10% penalty is still less than the interest.  Savings accounts pay .1% today, so stashing money in IRA as a "emergency savings account" is probably gonna work out just fine.

That's my .02 centavos...

Just for clarification, it's not capital gains tax you pay when withdrawal from a traditional IRA.  It's taxed as income.  The money went in pre-tax, so it is taxed at your income tax rates when it comes out.  This is unrelated to your age when you make your withdrawal or whether there's a penalty.


Good work JCH.  Sounds like you made the right choice.