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The Financial Quarterback ™
125 S. Swoope Avenue, Suite 109
Maitland, FL 32751

Phone: 407.622.6669
     Fax: 407.599.9243

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Questioner: Jane

Question: I contribute the maximum yearly to a 401K from my employer. Recently I have been earning a considerable amount of 1099 income from other sources which I report on a Schedule C. What other retirement accounts are available for me to contribute before tax dollars to, and what are the limits that can be contributed? SEP-IRA? I would not qualify for Roth plans. Thanks

Answer: Jane, thanks for your questions. That is great to hear that you are doing well in your business.

I am happy to tell you that the IRS has answered this very question: “Yes". A SEP can be set up for a person’s business even if he or she participates in another employer’s retirement plan.

In 2008, the maximum contribution to an SEP-IRA is the lessor of $46,000 or 25% of your ‘eligible compensation.’ These limits apply to all contributions to defined benefit plans, which means you have to take into account 401k contributions when determining the maximum contribution to an SEP-IRA. So if you contributed $15,000 to a 401k, your maximum SEP-IRA would be $31,000 or 25% of your ‘eligible compensation,’ whichever was less. If you are self-employed, however, the definition of ‘eligible compensation’ gets more involved, the result being that the maximum percentage is 20% (not 25%). You’ll find more details in IRS Publication 560.

To be safe consult your CPA, EA or tax preparer when calculating your eligible contributions. Never consult your IRA custodian since they might pretend its their job to help you, but it isn't and often times they get it wrong and you are left taking the blame.

Good Luck.

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