SEP-IRA vs Traditional IRA
I am assisting a client with 2020 tax returns. They are trying to maximize their retirement plan contributions to get below the $150k AGI to take advantage of stimulus checks. Client is 74 and retired at the end of 2020. Spouse retired several years ago and is 76. Client opened a solo 401k in 2021, but unfortunately is not able to contribute the employee elective deferral since it was established after 12/31/20. Two questions:
(1) Client has a SEP-IRA and was going to contribute the max; can he instead forgo the SEP-IRA contribution and meet the IRS qualification for not being covered under an employer plan (no contributions to SEP-IRA or solo 401k) so that both he and his spouse can make deductible contributions to their rollover IRA’s? They will be able to get a bigger deduction this way than by contributing only to the SEP-IRA – not to mention maximizing QBI.
(2) They did not have any RMD’s for 2020 with the CARES Act and did not make any QCD’s. If they choose to make a QCD for 2021 or in future years, am I correct that the QCD would first need to be offset by these deductible contributions? For example, if wife made a $5,000 IRA contribution and took a $10,000 QCD in 2022, $5,000 of that would be tax-free vs if husband made a $7,000 IRA contribution and took a $10,000 QCD in 2022, only $3,000 of that would be tax-free?
Thank you very much for any guidance you can offer here!
Permalink Submitted by Alan - IRA critic on Mon, 2021-03-22 19:34
SEP contributions for self employed owners are voluntary. However, the year IN WHICH a SEP contribution is made is the year in which the owner is treated as a participant in an employer plan. Therefore, if owner made a SEP contribution in 2020 for either 2019 or 2020, they are a participant in 2020 and a TIRA deduction for 2020 would be subject to MAGI limits.
You are correct about the harsh anti abuse provision for those making deductible TIRA contributions after 70.5. The amount deducted offsets QCDs made in current or subsequent years, and QCDs made that are no longer reportable as QCDs are treated as distributions made to the taxpayer, donated, and then subject to possible itemized deductions if the taxpayer can even itemize.
Note that if 2021 AGI drops, client can receive a belated 3rd stimulus, probably as a recovery rebate when filing their 2021 1040. But such 2021 AGI cannot be used to generate either of the first two stimulus programs.