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I am employed full time but I also have a small side business

with no employees. I have...
I am employed full time but I also have a small side business with no employees. I have a personal IRA that I started 2 years ago. In 2012 my wife and I made too much money for me to deduct the IRA contribution (I also have a 401K through work). I just learned about the SEP. Could I just make the appropriate contribution to the IRA I already have and declare it as an SEP contribution to receive the tax savings or do I have to set up a new, separate IRA?
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Answered in 11 minutes by:
4/1/2013
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,869
Experience: 15years with H & R Block. Divisional leader, Instructor
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Robin D :

Hello and thank you for using Just Answer,
Although you cannot just assume your IRA is a SEP, you do have till April 15 to set up the SEP for contributions to count for 2012. Here is a question that the IRS answered on their web page:


Can my employer deposit the SEP contribution from my work plan into my existing traditional IRA or must I set up a separate SEP-IRA?


Your employer may be able to deposit SEP contributions into your traditional IRA depending on the:



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  • terms of your employer’s SEP plan document.


There are three basic steps in setting up a SEP, all of which must be satisfied.



  1. Adopt a formal written agreement by signing one of these documents:

    • IRS model SEP using Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement;

    • IRS-approved prototype SEP, offered by banks, insurance companies, and other qualified financial institutions; or

    • individually designed SEP plan document.




  2. Provide each eligible employee with information about the SEP. If you established the SEP using the Form 5305-SEP, the information must include a copy of the Form 5305-SEP, its instructions and the other information listed in the Form 5305-SEP instructions. If you used a prototype SEP or individually designed SEP, you must provide similar information.


  3. Set up a SEP-IRA for each eligible employee with a bank, insurance company or other qualified financial institution. The employee owns and controls the SEP-IRA.

Robin D :

In short, yes you can do what you want to do, just make sure that the plan document (even though only you will have a copy) states this is allowed.

Customer:

Would my setting up this SEP now have any negative consequences for future years?

Robin D :

That is a very open ended question as future is something that cannot be seen. An SEP follows the same rules as an IRA. The ability to contribute is not lost unless your net earnings are reduced. For purposes of the SEP plan rules, a self-employed individual’s compensation means net earnings from self-employment determined under Internal Revenue Code section 1402(a). You cannot use your wages from your regular employment to determine your contributions.

Customer:

If I make this contribution now for myself for 2012, does that mean that I am locked in to using the SEP format for future years or could I switch too a SIMPLE or a 401k as the needs of the business change?

Robin D :

You would be allowed to switch. The SEP could be rolled into a 401K if your business changes or the SEP terminates.

Customer:

Awesome. Thanks for your help. I gotta go and take my kids to the zoo!

Robin D :

Your positive rating is always thanks enough.

If you could also participate in the very short survey that Just Answer will send you by e-mail I would appreciate that very much.
I really enjoyed working with you – please feel free to request me again when you come back to ask another question.

Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,869
Experience: 15years with H & R Block. Divisional leader, Instructor
Verified
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Robin D.
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Category: Tax
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