Contribute to SEP or Roth first?
What is the best approach: S-corp, my wife and I are the only members. AGI of about $100k, salaries of $25k each….25% bracket.
We have both SEP and Roth set up for each of us. Question: What is the best strategy if we want to contribute a total of $12K yearly? Should we max out the SEP first, the Roth, or split evenly?
I have searched and can’t find a straight answer. I like the yearly tax deduction the SEP provides, but I’m wondering if this is the best strategy long term. Any input would be much appreciated.
Permalink Submitted by mk foss on Wed, 2012-10-10 16:52
The S-corporation makes the SEP contribution and takes the deduction. The maximum is 25% of salaries per year. S corporation returns are due 9/15 so it’s too late to make a SEP contribution for 2011. Individuals cannot make a SEP contribution based on S corporation earnings, so no 2011 SEP deduction is available. For 2012, the SEP contribution is available to the S corporation and would cover all employees – not a problem with just the two of you.
The Roth is also available for 2012 – it looks like you will have no difficulty with the AGI limit. You can still make a Roth contribution even though the S corporation contributes to the SEP. If you only want to put away $12,000 you need to choose if you want a tax deduction or not. A portion of the SEP could be converted to a Roth – that’s another alternative for you to consider.
Permalink Submitted by gregg peckham on Wed, 2012-10-10 17:01
hmm …my accountant has been filing my 1120s on a calender year basis for years now, due in March 15th I believe
My question would still be, which would be more beneficial, contributing to the SEP or Roth(or split) if we have $12k total to contribute.
Edit: just looked it up, from IRS site:
When To File
Generally, an S corporation must file Form 1120S by the 15th day of the 3rd month after the end of its tax year. For calendar year corporations, the due date is March 15, 2012.
Permalink Submitted by Denise Appleby on Wed, 2012-10-10 21:01
The answer depends on your financial/tax profile. Many factors ( financial and nonfinancial) are taken into consideration when making such as decision. Working with a financial or tax professional who knows the details of your finances should provide a reasonable response to your question.
Permalink Submitted by Alan Spross on Wed, 2012-10-10 21:40
The extended due date is 9/15 for an S Corp, and many Corps file extensions. The SEP contribution can be made up to the extended due date.
With respect to a SEP vrs Roth IRA contribution when you can’t afford both, the main factor is your current tax rate vrs your estimated tax rate in retirement. This is the same criteria used in determining if a Roth conversion is beneficial or not. If your tax rate is expected to be higher or in many cases the same in retirement, favor the Roth IRA first. However, if you expect your tax rate to be lower in retirement, then contribute to the SEP IRA first.
If you make Roth IRA contributions, once the extended due date has passed, you cannot go back to a pre tax contribution. But if you make SEP IRA contributions, you can at any later date you wish convert from your SEP IRA to a Roth IRA.
Permalink Submitted by brooke wentner on Wed, 2013-04-24 17:01
Does a contribution to one’s SEP count against what he/she may contribute to a Roth and vice versa?
Permalink Submitted by brooke wentner on Wed, 2013-04-24 17:10
Does a 401k plan participant need a qualifying event to convert these assets to a Roth IRA? Can a SEP IRA be converted to a Roth IRA?
Permalink Submitted by Alan - IRA critic on Wed, 2013-04-24 18:06
A SEP IRA balance can be converted to a Roth IRA. SEP IRA contributions and Roth IRA contributions do not limit contributions to either plan, each has it’s own separate contribution limits. A 401k plan active employee does require a qualifying event to take in service distributions including rollovers to either a TIRA or Roth IRA. However, if the plan offers a designated Roth option, pre tax 401k balances can be rolled over (converted) to the Roth 401k account.