Live Debt Free

Pay off debt. Save. Give. Live your mission.

  • Blog
  • Contact Us
  • Credit Scores
  • Spending
  • Investing
  • Earn Money

SEP IRA Contribution Question: AJ Answered

03.03.2010 by Matt Jabs //

Have a question of your own?  Ask Matt Jabs for free!  🙂

SEP IRA contribution dilemma

DFA reader AJ asked:

Hi, Matt – Just a quick question (I think.) I am a self-employed contractor receiving a 1099 from my contracting company where I provide marketing services. This represents 100% of my income. I have an SEP IRA which I contribute to. Do I set it up to contribute to my SEP IRA as an employee or an employer? Does it matter?

SEP IRA contributions as employee or employer?

If you are looking for more a more in depth information on this topic check out our article on SEP IRA contribution limits and deadlines.  If you’re considering a 401k, be sure to consider current 401k contribution limits.

When I received this question from AJ I immediately emailed her back to ask a few questions that needed to be cleared up.  Here is the conversation that ensued and what we came up with as an answer:

Me to AJ: Hi AJ, who is asking you to differentiate between your status as an employee or an employer?  Are you filling out a tax form that asks this info?  Are you being asked by a brokerage firm to supply this info?

AJ to Me: Hi Matt, when going in to make the contribution with my brokerage firm, the firm asked me whether it was an employee, employer, or individual contribution.  I actually talked to someone at the brokerage firm and they said that when you contribute as an individual it’s like contributing $5K to any type of IRA.  And that contributing as an employee only applies to SAR/SEP IRAs and so the answer is that I should contribute as an employer.  Hopefully that is in line with what you thought as well.  Thanks.

Me to AJ: Right, that makes sense… but remember that when you make employer contributions, you must also make contributions to the SEP of all eligible employees.  If you’re the only employee (Sole Proprietor) then it doesn’t matter.

AJ to Me: Yes, right.  Luckily, it’s just me!  Thanks for responding.  Hopefully this will help others.

In summary…

AJ is a sole proprietor so she must contribute as an employer.  This is also correct if the business had employees and business income, but if she did have employees she would need to contribute to the SEP IRA of all employees along with her own.  As I understand it, her brokerage firm was looking to decipher whether or not AJ’s business had employees.

Do you have an SEP IRA?

Is there any other advice you would give to AJ other than to keep saving?  🙂

Have a question of your own?  Ask Matt Jabs for free!  🙂

*Disclaimer*
We accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Any advice taken from this site does not in any way establish a client/adviser relationship.  We always recommend that you consult with a licensed, qualified professional before making any financial or investment decisions.

Categories // Retirement, Savings Tags // Advice, Retirement, Savings, sep ira

Help with Debt and Retirement Savings – T Collins Answered

02.02.2010 by Matt Jabs //

Need help with your situation? I offer free personal finance advice.

Visit the Ask Matt Jabs page and fill in the form to ask your question for free.

Who can I trust for help with debt?

DFA reader T. Collins asked:

I’m lost, I don’t know where to begin, or whose advice to trust. I’m broke and 53 years old, spouse is 55.  We have not saved a dime for retirement.  When I had a little extra I wasn’t paying attention, I lost the business and lost the home.  I work full-time and also a second job, spouse gets SSI.  I’m in debt from credit cards, losing house, etc. and am renting now.  I can barely make everyday bills because I’m so poor.  I have to take money used to pay necessities to get started on this debt so I don’t end up living under a bridge.  I currently make $23,000/yr. – my spouse gets $9,000 after medicare payments.  I just woke up financially… can start a 401k?  HELP!

Debt counseling

Simply put… you need debt counseling, debt management, and financial education.  We could single out the subject of your debt or your lack of retirement savings, but I think the best decision is to steer you in the direction of someone who can help you on a more personal and on-going basis.

Do not feel bad, the need for debt counseling is not something you should be ashamed of, rather it is a common reality for many Americans today.  Our culture and education system have failed to provide most of us with the personal financial skills necessary to live a healthy financial lifestyle.  The reality of this fact is evidenced by the national credit crisis and record levels of consumer debt… among other things.  Couple our excessive culture with aggressive corporate marketing and our lack of individual personal responsibility and we have ourselves a perfect personal finance storm – and T. Collins is but one of many who suffer.

Where can we go from here?

T. Collins, you are not alone and since you did not give specific numbers and are just asking for general advice that is where we’ll focus our efforts.

Trustworthy debt counseling

We need to designate between two opposing business models that confuse the average consumer and erode confidence in debt counseling.

  • “For profit” debt settlement companies.
  • “Not for profit” debt counseling companies.

A trustworthy not for profit debt counseling company will typically offer to help you help yourself and will steer you toward debt settlement and bankruptcy only as last options.

The financial weapons you need, and the ones a trustworthy company will help equip you with are:

  1. Debt counseling – Trained counsel to help you better understand your situation so you can gain an emotional foothold and prepare yourself and your family for the road ahead.
  2. Debt management – Helping you find and work toward real solutions for your specific financial needs.
  3. Financial education – Helping teach you the basics of personal financial responsibility so  you can dig yourself out of the hole and avoid future troubles.

Specific people to contact for help

T. Collins, I will give you two organizations to contact, both of which are trustworthy and not for profit.

  • National Foundation for Credit Counseling – Look around the NFCC website making sure to utilize the Find a Counselor feature.  They offer debt counseling over the phone, the Internet, or in person so be sure to take advantage.
  • Green Path Debt Solutions – Visit their location page to see if they have an office local to you.  I have not had much interaction with debt solutions companies but this is one I can vouch for.

A few personal finance starters

You need to keep a written budget.  You need to live below your means.  You need to sacrifice your wants for your needs… there is no time to waste.  You need to work your tail off to earn as much as possible.  You need to spend as little as possible.  You need to destroy any credit cards you have and implement the cash envelope system to curb any bad spending habits.  Do not fore go necessities to repay debt, make sure the heat is on and there is food to eat, what is left over can then be split between creditors accordingly.  Do not focus on retirement savings now, focus on getting control over you situation then worry about your nest egg.

Think on these things and contact a counselor from one of the sources above.  Godspeed.

What do you think?

What are some tips I may have missed that T. Collins should use to gain control over his dire financial situation?

If you need personal finance advice… ask Matt Jabs.

*Disclaimer*
We accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Any advice taken from this site does not in any way establish a client/adviser relationship.  We always recommend that you consult with a licensed, qualified professional before making any financial or investment decisions.

Categories // Debt, Retirement Tags // 401k, Advice, Debt, Retirement

SEP IRA – Contribution Limits and Deadlines

01.22.2010 by Matt Jabs //

Summary of SEP IRA, contribution limits, and deadlines

A SEP is a simplified employee pension plan and is designed to furnish business owners with an easy way to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP IRA).  Contributions are tax deductible and investments grow tax deferred.  10% early withdrawal penalties exist if participants make withdrawals prior to turning 59 1/2 – much like other tax sheltered plans (401(k) and traditional IRA.)

[table id=4 /]

Follow this link for information on Traditional and Roth IRA contribution limits.

Details of SEP IRA, contributions limits, and deadlines

The SEP IRA was designed as a low cost solution for allowing small businesses to provide employees with a pension without shouldering the high administrative costs of 401k’s and defined benefit plans. When an employer contributes to a SEP IRA the money goes into an IRA owned and managed by the employee.

Know the difference between contributions and deductions.

  • Contribution – The amount you pay into a plan for all those participating in the plan, including self-employed individuals. Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant.
  • Deduction – The plan contributions you can subtract from gross income on your federal income tax return. Limits apply to the amount deductible.

Which broker should you use to manage your SEP IRA?  Good question.  I highly recommend using a discount broker and of the firms I’ve worked with I like TradeKing the best.

SEP IRA contribution limits

For corporations:

One of the primary benefits of a SEP IRA is that it has a high contribution limit. The 2009, 2010, and 2011 contribution limits for eligible employees are the lesser of either $49,000 or 25% of total employee compensation.

  • Example 1: Your employee earned $50,000 for 2010. The maximum allowable contribution to their SEP IRA is $12,500 (25% x $50,000.)
  • Example 2: Your employee earned $200,000 for 2010.  The maximum allowable contribution to their SEP IRA is $49,000 (because 25% of $200k is $50k which exceeds the $49k limit.)

For sole proprietors:

Contribution limits for the self-employed are not quite as straight forward but, barring limits, are approximately 20% of net profits with a maximum of $49,000. Remember that any contributions to a 401(k) or IRA, along with any employer matches to your 401(k) contributions, reduce your $49,000 maximum. Basically… all combined investments in defined contribution plans cannot exceed $49,000.

  • Example 1:  You earned $50,000 for 2010.  Your maximum allowable contribution to your SEP IRA is $10,000 (20% x $50,000.)
  • Example 2:  You earned $250,000 for 2010.  Your maximum allowable contribution to your SEP IRA is $49,000 (because 20% of $250k is $50k which exceeds the $49k limit.)

Only income from the business can be contributed.  Put another way, you cannot contribute money from another job separate from your business. Also, an adjustment is necessary to account for their ability to deduct both FICA taxes paid, and contributions to their own SEP IRA, both of which count toward their maximum deductible income for the year.

SEP IRA contribution and deduction deadlines

The contribution deadline for previous year SEP IRA contributions is the same as the due date of your employer’s return, including extensions. That means it is not too late for those with small businesses to lower their taxable income by contributing to their SEP IRA.

Other SEP IRA details

As mentioned above, most of the same rules that govern a Traditional IRA also apply to a SEP IRA. Specifically the minimum, no-penalty withdrawal age of 59-1/2, and the required minimum distributions beginning at age 70 1/2. Since the money contributed to a SEP IRA is pre-tax, distributions will be taxed at whatever rates are in effect for your bracket during the year of distribution.  Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70 1/2 . If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70 1/2.  Just remember that participants age 70 1/2 or over must take required minimum distributions. As a final consideration, the IRS does not allow a loan to be taken out against the remaining account balance. This common feature of 401k plans provides a semi-liquidity option many have come to expect, the absence of which should be considered before large sums are contributed.

Which broker should you use to manage your SEP IRA? Good question. I highly recommend using a discount broker and of the firms I’ve worked with I like TradeKing the best.

Note:  I am not a tax professional. Consult IRS Publication 560 and/or your tax professional for details.

Categories // Investing, Retirement, Savings, Taxes Tags // business, Investing, Retirement, sep ira, Taxes

  • « Previous Page
  • 1
  • 2
  • 3
  • 4
  • 5
  • Next Page »

Popular Posts

  • Understanding & Improving your Cash Flow
  • Credit Card Debt Reduction Handbook
  • Our Monthly Debt Reduction and Savings Statements
  • Pay off Credit Cards VS Build Emergency Fund Savings - Me VS Suze Orman
  • Credit Cards - Close 'em Shred 'em & Forget 'em!
  • More Reasons to Pay Off Credit Card Debt
  • Wise Use of Paid off Credit Cards? You Decide.
  • The Whole Armor of Personal Finance
  • One World Currency - New World Order
  • Debt Testimonials - Encouraging Success Stories!

Disclaimer

Content on Debt Free Adventure is for entertainment purposes only. Rates & offers from advertisers shown on this website may change without notice: please visit referenced sites for current information. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. We respect your privacy. Privacy policy.

Copyright © 2021 · Modern Studio Pro on Genesis Framework · WordPress · Log in