Quote:
Originally Posted by cjlipps
The SEP has a very high contribution limit but it is a strict profit-sharing plan and the limit (high $40K's as you mention) cannot exceed 25% of your earnings. (That's if you earn on a W-2. If you are a partnership or sole proprietor there is a more complex calculation that determines your maximum contribution) So you would have to pay yourself @ $200K to benefit fully from the SEP. There are other options that might suit your situation better.
Check with your tax or financial adviser for more detail or PM or e-mail me.
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According to my understanding of SEP IRAs, I'm not understanding your writings of SEP IRAs.
Here is my understanding of SEP IRAs:
1) The SEP has no dollar contribution limit. It is based on percentage only.
2) It is not always a strict profit-sharing plan. I have a SEP IRA, and I am not under any profit-sharing plan for my business.
3) The limit is definitely not the high $40Ks per individual. There is no cap that I'm aware of.
4) It may have changed, but I thought 15% of net self-employed income (with no income cap) was the annual maximum percentage saving limit.
5) A SEP has absolutely nothing to do with a W-2.
6) There is no more complex calculation just because you are a sole proprietor, or partnership. It only depends on how much you earn.
7) Earning as much as $200K would not have anything to do with the percentage you can sock away for yourself. -Since 15% of $200K is $30K, which is a whole lot more than the $6,000.00 present cap for a self-directed, or Roth IRA. There are income caps limiting ones's eligibility to participate in Roth IRAs.
The facts is, if you are making the big bucks, a SEP is the way to go, for that particular year. If not, a Roth is usually the better small IRA tool for that year. Anybody can look up the IRS' tax code on-line and check their own situation.