Author Topic: Checking my understanding- SEP IRA and Roth IRA  (Read 3524 times)

Bracken_Joy

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Checking my understanding- SEP IRA and Roth IRA
« on: February 13, 2015, 01:18:21 PM »
So fiance has a SEP IRA through his work, no 401k. I have two questions: 1- my understanding is that, even though you have to choose between contributing to a roth or a traditional IRA each year, you can contribute to one of these in addition to a SEP, correct? We called Vanguard and they were a bit fuzzy on tax code.
2- fiance will be taking over the business here in a couple years. What are the benefits of SEP vs 401k? If you are self-employed, what is the maximum for them? What about with employees?

I guess partially I'm still unsure what it means by "employer contribution" on the SEP vs "employee contribution" on the roth/traditional. If I could get an "explain it like I'm 5" I would really appreciate it. I've read until my eyes are crossed and still feel like I'm missing the nuances.

NotJen

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Re: Checking my understanding- SEP IRA and Roth IRA
« Reply #1 on: February 13, 2015, 01:28:28 PM »
From an employee standpoint:

When I first started working, my company did not have a 401k, but they made contributions to a SEP IRA for us (profit sharing).  I could not contribute any of my income to the SEP. I could contribute to a Roth IRA (or probably a traditional, but I chose Roth).

Now, we have grown and I'm glad they started offering a 401k. They still contribute the same amount of profit sharing (using 3% safe harbor contributions each paycheck, with extra quarterly). But now I can contribute up to the IRS max, as well as fund my Roth IRA.

Bracken_Joy

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Re: Checking my understanding- SEP IRA and Roth IRA
« Reply #2 on: February 13, 2015, 08:33:27 PM »
From an employee standpoint:

When I first started working, my company did not have a 401k, but they made contributions to a SEP IRA for us (profit sharing).  I could not contribute any of my income to the SEP. I could contribute to a Roth IRA (or probably a traditional, but I chose Roth).

Now, we have grown and I'm glad they started offering a 401k. They still contribute the same amount of profit sharing (using 3% safe harbor contributions each paycheck, with extra quarterly). But now I can contribute up to the IRS max, as well as fund my Roth IRA.
So in you experience, is a 401k more desirable than a SEP?

lise

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Re: Checking my understanding- SEP IRA and Roth IRA
« Reply #3 on: February 13, 2015, 08:51:07 PM »
I am self employed and maintain a SEP-IRA.  I didn't even know a 401(k) was an option when I started freelancing, just my accountant/other freelancers recommended this approach.

This may help you with the pro's and con's when your husband takes over the business:

http://www.getrichslowly.org/blog/2013/06/06/sep-ira-vs-self-employed-401k/

Retired To Win

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Re: Checking my understanding- SEP IRA and Roth IRA
« Reply #4 on: February 15, 2015, 09:26:56 PM »
An SEP-IRA is set up by the employer for his employees.  The contributions that go into an SEP-IRA are employer contributions only.  They are not part of or come out of the employee's earned income.  They don't show at all on 1040 forms.  They are not even subject to social security taxes.

An employer can make contributions to an SEP-IRA up to 20% of an employee's income, as long as that is done for all employees that "qualify" based on time on the job, etc.

Now, if you are self-employed, you can (wearing your employer hat) make such SEP-IRA contributions to yourself (wearing your employee hat).

All that being said, make sure you verify for yourself what the rules are, which can be found on the irs.gov website.  Just do a search under SEP.
« Last Edit: February 15, 2015, 09:29:13 PM by Retired To Win »

Bracken_Joy

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Re: Checking my understanding- SEP IRA and Roth IRA
« Reply #5 on: February 16, 2015, 06:43:23 AM »
An SEP-IRA is set up by the employer for his employees.  The contributions that go into an SEP-IRA are employer contributions only.  They are not part of or come out of the employee's earned income.  They don't show at all on 1040 forms.  They are not even subject to social security taxes.

An employer can make contributions to an SEP-IRA up to 20% of an employee's income, as long as that is done for all employees that "qualify" based on time on the job, etc.

Now, if you are self-employed, you can (wearing your employer hat) make such SEP-IRA contributions to yourself (wearing your employee hat).

All that being said, make sure you verify for yourself what the rules are, which can be found on the irs.gov website.  Just do a search under SEP.


Oooooooooooooh. And lightbulb. I get the point now, thank you! Could not understand the benefit before.

Love this forum. Your guys are the best.

NotJen

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Re: Checking my understanding- SEP IRA and Roth IRA
« Reply #6 on: February 16, 2015, 11:28:42 AM »
From an employee standpoint:

When I first started working, my company did not have a 401k, but they made contributions to a SEP IRA for us (profit sharing).  I could not contribute any of my income to the SEP. I could contribute to a Roth IRA (or probably a traditional, but I chose Roth).

Now, we have grown and I'm glad they started offering a 401k. They still contribute the same amount of profit sharing (using 3% safe harbor contributions each paycheck, with extra quarterly). But now I can contribute up to the IRS max, as well as fund my Roth IRA.
So in you experience, is a 401k more desirable than a SEP?
For an employee who is not an owner, yes, as long as the employer contributions are the same for each.