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SEP Tax Deduction Available to Offset Rollover IRA


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I have just begun selling real estate. I have been advised that I have the opportunity to contribute to a Sep IRA and deduct 25% of my earnings or approximately $40,000 whichever is less from my tax liability. I also want to convert a traditional IRA to a Roth IRA this year. Could I use the tax deduction from my SEP IRA contribution to offset the tax increase I will receive from the conversion to a Roth?

Thanking you in advance.

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The two actions are unrelated but in effect one will offset the other (partially, I assume), so yes.

2 quick comments -

you can't convert to a Roth if your AGI is greater than $100,000.

the 25% limit is on net earned income - i.e. after you take the SEP deduction. That's roughly* 20% of gross before making the SEP contribution. So if you have self-employment income of $100,000 before taking the SEP deduction, the maximum SEP deduction is around $20,000 (25% of your net taxable income of $80,000 after taking the deduction).

*There's also an adjustment for self-employment taxes.

Ed Snyder

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I have just begun selling real estate. I have been advised that I have the opportunity to contribute to a Sep IRA and deduct 25% of my earnings or approximately $40,000 whichever is less from my tax liability. I also want to convert a traditional IRA to a Roth IRA this year. Could I use the tax deduction from my SEP IRA contribution to offset the tax increase I will receive from the conversion to a Roth?

Thanking you in advance.

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Thanks so much for the quick response. The info was very helpful and articulate :)

In case you didn't know, and presuming you have a one participant plan, a 401k might provide a larger deduction. The 401k allows the same 20% deduction allowed by the SEP, plus it allows for a so called employee

deferral under the 401k portion---possibly $14-18000 over and above the "employer" 20% part. In many situations, you'll get closer to the $42,000 limit (46,000 if age 50 no later than 12/31/05) than the SEP allows.

This 401k is a 'qualified' plan and therefore requires more overhead. At a minimum, remember 2 things:

Amend the plan when you're told to (if you want it to be effective for this year, sign it before 1/1/06. The SEP, on the other hand, can be adopted as late as your tax return's due date, including extensions). Sooner or later, you'll need to file at least 1 Form 5500 series return, probably a 5500-EZ.

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I am not a tax expert- so I am unable to say whether the two would actually offset each other. However, eligible contributions to your SEP IRA deductible, and would therefore reduce income taxes you would owe…..I am assuming you are a business owner and has established a SEP for your business?

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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The conversion of the IRA to a roth is taxed as a distribution from the IRA on line 16 of the 1040 form. The Sep deduction is taken on line 32. If the amount of the taxable IRA distribution equals the amount of the SEP contribution there will be no additonal income tax due on the roth conversion.

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