young married couple looking to do something with self employed income. SEP?

[Lori H]

married couple ages 30 and 28. he makes about 80k annually contributes appx 7000 to his 401(k) which includes match. he puts in 4% and they match up to 4%.

she made 13,400 as a self employed medical transcriptionist in 2004. usually she makes 19 to 20K. they have about 154k in cds and 36k in savings and feel they pay too much in income taxes.

would directing her income into a SEP be a good idea? roth IRA?

[wmyer]

If the problem is that they want to pay less taxes currently, a ROTH IRA won't solve that, because there's no tax deduction, although earnings on ROTH IRA contributions are generally tax-free. Why isn't he putting more than 7K in the 401(k)? Putting more in the 401(k) would reduce current federally taxable income.

[Lori H]

wmyer

thanks for your response. my first advice to him would be to increase his deferral level, but i believe he is deferring up to the amount where he receives the maximum employer match. since she is self employed she could shelter up to 20% in a SEP, perhaps??

[wmyer]

But why bother opening a SEP when he could simply shelter more of his income in the 401(k) ? She'd only be able to put away $4K or so in a SEP each year, but he could put in an additional $7K or so to the 401(k). Unless sheltering income isn't their real goal here.

[Belgarath]

Aside from him increasing the (k) contribution, if she wants a plan of her own, why doesn't she sponsor a SIMPLE IRA rather than a SEP? The SIMPLE is limited only by dollars, not % of income, so she could actually contribute far more to the SIMPLE.

[mbozek]

max deduction to SEP is 2.4k (13.4 -1.3)= 12.1 x.20.SEP can be established up to date for filing tax return, including extensions. Max deduction to SIMPLE is 10k. Dont think she can set up a simple for 04. They can contribute to deductible IRAs for 04 with CDs if their AGI is less than 70k. Assuming their gross income in 05 is 100k (80+13.4 + 6.6 in investment income) they could contribute 14k to 401k, 10k to SIMPLE and 3k each to IRAs which would come from the taxable investments reducing the AGI to 70k.

For 04 They could make Roth IRA contributions instead of deductible IRA with the CDS or savings since these amounts already are after tax $ and shelter the income from taxes. The Roths could be invested in dividend paying stocks paying 4-5%.