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DB Plan and SEP IRA


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What are the combined contribution limits for a SEP IRA and DB Plan? Self employed individual (Schedule C) currently is maxing out a SEP IRA and would like to add a DB plan on top of this to increase his contributions. If he contributes the maximum to the DB, what would his SEP contribution be limited to?

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My understanding was an employer could not sponsor a DB Plan and use "the model SEP" but as "Doubtful" [thought a first name should be given] McGovern indicated could use an individually designed or prototype SEP. Is this not correct?

Well, anyway, if you can maintain a SEP-IRA, so be it. Else, maintain a PS plan. If a DB contribution is made, do not contribute more than 6% of compensation to the DC Plan, lest 404(a)(7) will be triggered. For this purpose, 401(k) elective deferrals do not count towards the 6%.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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If you have a SEP it is the only plan you can have. You can't have a SEP/DB combo.

Lou:

You must be thinking of a SIMPLE IRA. If you had taken the time to review the rules you would have discovered that that only DC plan contributions are aggregated with a SEP if they are part of a controlled group. See IRS pub 560, P 6 col 3. A SEP is not aggregated with 1)any Qualified DB plan or 2) a Qualified DC plan in which the employee does not own more than 50% of the employer who sponsors the DC plan.

mjb

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My understanding was an employer could not sponsor a DB Plan and use "the model SEP" but as "Doubtful" [thought a first name should be given] McGovern indicated could use an individually designed or prototype SEP. Is this not correct?

Who is the doubtful one here???

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Who is the doubtful one here???

Didn't mean to offend. I should have named you [Definite]

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Jay, distinguish between prototype and model SEP IRA. I believe you can use a prototype (e.g., Vanguard's*) so long as it is not the model SEP.

*This is for illustration. I have no idea whether or not Vanguard provides a prototype SEP IRA.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Interesting. So you can have a max DB plan and if you don't use the prototype SEP-IRA document you can also fund 25% of eligible comp in a SEP-IRA ? Sweet.....

I don't think so. I think the IRS will treat the SEP as defined contribution/ individual account plan when you start looking at the 404(a)(7) combined limit.

I think using a protoype allows you to have a SEP instead of a profit sharing plan but I don't think it extends the deduction above what you could get with a DB/PS combo.

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  • 4 years later...

It's been awhile since anyone has posted here; however, I want to follow up by asking whether you disagree with either of the following. I also have a follow up question:

1. The 404(a)(7) limit will cap the DC deduction to 6% of comp. (unless the plan is subject to PBGC). This really the same whether the plan as a SEP or PS; however,

2. A regular SEP (i.e., not a SAR-SEP) does not allow for elective deferrals. That means the SEP loses a $24,000 contribution opportunity (2015, born before 1966). I think that, in many cases, the loss of deferral opportunity will outweigh the savings from using a SEP-IRA.

FOLLOW UP QUESTION: I am speaking with a prospect; not covered by PBGC. She has already funder $53,000 to her SEP this year. Do you agree that her total contribution for a SEP/DB combo will be limited to 31% of pay?

Thanks

.

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FOLLOW UP QUESTION: I am speaking with a prospect; not covered by PBGC. She has already funder $53,000 to her SEP this year. Do you agree that her total contribution for a SEP/DB combo will be limited to 31% of pay?

Thanks

.

Is there a "document" that covers the SEP? That might provide the answer. It might provide many answers to this weird discussion.

My understanding was that the SEP document would need to have coordinated DB language, which I sincerely doubt exists. But maybe it does.....

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The 404(a)(7) limits do apply to SEPS. Lou was right.

404(h)(3)

(3) Coordination with subsection (a)(7)

For purposes of subsection (a)(7), a simplified employee pension shall be treated as if it were a separate stock bonus or profit-sharing trust.
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  • 2 years later...

I am once again reviving this thread (at least I hope someone can answer me)

I opened model SEP-IRA through fidelity and contributed in 2014. I did not make any contributions to any SEP after tax year 2014 but I never closed it. I opened a DB plan and contributed in 2015 and 2016. Both plans remain open but I have only contributed to one or the other in a given tax year. Are the IRS rules about the limits of contribution each year or about even having both open together?

I'm a sole proprietor and the only employee.

 

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Closing a SEP-IRA - what does that mean to you?  It is an IRA with methods for employers to make contributions.  The employer contribution is voluntary, and the employer voluntarily stopped making contributions.  So to me it just looks like any other IRA account.

Since you did not deduct for both the db plan and the SEP, there are no tax issues to consider either.

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  • 1 month later...
Quote

Great, this is what I thought. The only reason I ask is precisely because I'm not sure what closing a SEP means to the IRS. Fidelity has been sending the IRS form 5498 for the model SEP every year stating no contributions (except for 2014) but providing the fair market value. Wasn't sure if that meant the model SEP was open and therefore I could not contribute to the DB plan. In any case, I'll send a note to fidelity to close the SEP and perhaps they will stop sending the IRS form 5498.

And thanks so much for replying!

 

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In a related question, I understand that I must have a prototype SEP IRA which allows simultaneous contribution to other plans such as the DB plan. I was told that funding a prototype SEP for the self-employed individual (sole proprietor, no employees) reduces schedule C income and could therefore impact DB plan calculations (I plan to fund the DB plan to the max allowed). Is this correct? On the form 1040, the deduction for both DB and SEP contributions is taken on line 28 and not as a schedule C expense. Would like to maximize retirement income, if possible.

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