SEP contribution and Roth IRA in same year

Submitted by Marina Ferrone on Sat, 2020-03-14 20:21

Taxpayer made a Roth contribution in the amount of $3,000 on 10/7/19 for tax year 2019. Taxpayer also wants to make a SEP contribution for 2019 based on SE earnings of $60,000 in the amount of $16,000 (rounded numbers). Are both contributions allowable or must we follow coordination rules. If so, is there a good strategy to unwind the Roth contribution? On a side note, there was also a SEP made for tax year 2018 and taxpayer is single. Taxpayer really wants to make the SEP for the tax savings.



Submitted by William Tuttle on Sat, 2020-03-14 22:14

Note: It is not clear what business entity type the taxpayer has. Maximum employer contributions are always 25% of compensation. However, how you calculate them depends on the business entity type:

  • If the taxpayer is an S-Corp 2% shareholder employee, their maximum employer contribution is 25% of their W-2 Box 1 wages.
  • If the taxpayer is a self-employed individual, the employer contribution itself reduces compensation. Therefore, the maximum employer contribution is calculated as 20% of business profit – 1/2 SE tax.

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