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Thread: Tax year IRA question

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    Featured Member Katherine's Avatar
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    Default Tax year IRA question

    So I opened up an Roth IRA and a SEP account this past year. I know that I pay taxes on my Roth IRA money that's contributed, so my question deals with the SEP. It's like a traditional IRA in the sense that the money I contribute is tax free. If I'm planning on maxing it out, do I have to by the end of the calender year? Or by mid April?

    If it's by mid April, then do I write off for 2006 only what went into the IRA in 2006? So I should contribute all I can this month. Or, can I write off all that goes into it counting for the 2006 year, meaning I can write off all I contribute into it until the end of the tax year?

    My accountant is away for the next couple weeks. We figured out what I needed to pay for this quarters taxes last week cause he's away now. I don't know who else to ask.

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    Default Re: Tax year IRA question

    You must contribute to the SEP by December 31.

    For a Roth or Traditional IRA, you can contrib up to April, but the contributions will have counted for 2006, aka $4,000 total. As far as I know, it doesn't matter whether you use cash earned in 06 or 07 to fund it, its all a big pile of money....

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
    "And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion

    Quote Originally Posted by Mia M
    If a cupcake was tossed at me... well, I'd only be upset if it missed my mouth

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    Featured Member Katherine's Avatar
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    Default Re: Tax year IRA question

    Ok. So I can make my 2006 contributions until April, but I can only use the money put towards the SEP BEFORE dec 31st 2006 as a 2006 write off. Is this correct?

    Thanks again.

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    Default Re: Tax year IRA question

    ^^^ yes correct ... and both contributions combined must fall under the $4000 annual limit for 2006 even if the actual timing of the 2006 Roth contribution is first quarter 2007, as Katrine already pointed out.

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    Default Re: Tax year IRA question

    You have until you file your return to fund your SEP. So for 2005, the very latest you can fund it is 10/16/2006 (Normally it would be the 15th but the 15th was a Sunday) assuming you filed an extension for April 15th. Once you file the return, unless you have already funded the SEP, it is too late.

    They do this because your max contribution is dependent on the numbers reports on the tax return.

    IRAs must be funded by 4/15 of the following year
    401ks must be funded by 12/31 of that year.

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    Featured Member Katherine's Avatar
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    Default Re: Tax year IRA question

    Great. My original question is answered. Thanks everyone.

    Aveji, I won't reach my max contribution on my SEP regardless of whether I write it all off or not (don't know if I can make it by Dec 31st). My ROTH is almost maxed out for 2006. I guess in the future I should focus on my SEP before Dec 31st as I have till April to do max the ROTH out, and since the money I put towards the ROTH has no impact on my taxes, it should take second place before Dec 31st.

    Thanks everyone...

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    Default Re: Tax year IRA question

    I won't reach my max contribution on my SEP regardless of whether I write it all off or not (don't know if I can make it by Dec 31st). My ROTH is almost maxed out for 2006
    By the wording of your comments, it would seem that you are under the impression that your SEP IRA and your Roth have separate contribution limits. In fact, there is one combined limit of $4,000 per year for ALL contributions to ALL qualified retirement accounts - and that portion of the $4,000 maximum annual contribution which can be directed toward a Roth is subject to a phase-out if your taxable income exceeds $95k per year as well.

    Perhaps the Roth phase-out limit is what you are referring to i.e. your Roth is almost maxed out - i.e. your taxable income is between the $95k threshold and the $110k cutoff, meaning that your maximum allowable Roth contribution is capped at a level below $4,000, thus leaving some balance between that capped amount and the $4,000 annual limit which could still be contributed to your SEP IRA ?

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    Banned Katrine's Avatar
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    Default Re: Tax year IRA question

    No, that's only Traditional and Roth IRA. SEP is different. You can put in up to 25% or 42K of earnings, with certain limitations.
    http://www.trustetc.com/irs/irs-news.html

    And yes, I made a mistake, you do have until April 15 or extension time to contribute for the previous year for the SEP as well.

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
    "And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion

    Quote Originally Posted by Mia M
    If a cupcake was tossed at me... well, I'd only be upset if it missed my mouth

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    Featured Member Katherine's Avatar
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    Default Re: Tax year IRA question

    Katrine- I saw that mistake, and considered it one, didn't feel the need to 'out' it.

    Melonie- Katrine is right on this. I am allowed a considerably higher contribution to my SEP account. Because of the amount of money I'm allowed to put into my SEP, I know that I cannot max it out. I know that between Jan to mid april, I could (with considerable HARD work and a STRONG savings ethic) max out my ROTH.

    So what I was saying is that from now on, I'll focus on putting as much as I can into my SEP before Dec 31 as all of that is a write off for that year. I will also make small monthly contributions to my ROTH, but once Dec 31 hits, focus on making sure that's maxed out before adding any more to my SEP. It doesn't matter when I contribute the money to the ROTH as it's taxed money already.

    I am pretty clear on all this. Thank you everybody. Looks like my fam will be getting holiday presents in Jan this year as every extra penny I have will be going into my SEP account to allow the tax write off for 2006.

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    Default Re: Tax year IRA question

    duhhh re different limits on SEP / SIMPLE IRA's ... sorry bout that !

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    Default Re: Tax year IRA question

    Eh, its all so confusing. And retirement planning is what I do every day for over a year now!!

    Another advisor just got FUCKED with a big client in the east. They setup a SEP for their business, and two employees quit this year. Yet due to the rules governing a SEP, the employer still has to contribute to the employees equally. So the boss is out almost $100k for two people who don't even work with him! The advisor has to reverse everything!

    In that case, a SIMPLE would have been appropriate. And don't forget Keough and Stretch and defined benefit plans and Individual (k) and Roth 401(k). Tip of the iceberg still!

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
    "And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion

    Quote Originally Posted by Mia M
    If a cupcake was tossed at me... well, I'd only be upset if it missed my mouth

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    Default Re: Tax year IRA question

    Girls, what provider would you recommend for Roth 401(k) and SEP IRA ? Also, will I be able to transfer my account from one provider to another in the future ? My accountant tell me to open SEP IRA, max it out to get the max tax deduction. I asked him about Roth 401(k) and he's like "why would you want that?". My guess is he just doesn't want to bother with extra paper work or something. But isn't it better to pay whatever taxes now and have the money grow tax free for decades (I'm 31 now). I wouldn't have to worry about what tax rates will be when I retire because distributions are also tax free. Besides, Roth 401(k) might not be available after 2010 and I don't qualify for Roth IRA. What are your thoughts? Should I do a split between Roth 401(k) and SEP IRA or should I contribute to only one account? I'm just starting to learn about investing, so any help would be appreciated.

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    Featured Member Katherine's Avatar
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    Default Re: Tax year IRA question

    Well if you don't qualify for one, you can't get one.

    Well, you do have to worry about tax rates a bit. To make sure you're in a lower one now than you will be at retirement. If you think you'll be in a higher tax rate at retirement, yeah, roth is the way to go. But many people work less and less as they get closer. Unless they just own lots of revenue building business', they'll prob just work the same job less and be at a lower bracket.

    I used my bank (I love M&T Bank!!) to open both my accounts. I chose funds in the Templeton family for mine.

    Good luck!!!

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    Default Re: Tax year IRA question

    I know that I can't open Roth IRA because my income is more than $110K. But I still want to have my money grow tax free, not just tax deferred as in SEP IRA or regular 401(k). That's why I'm considering Roth 401(k). I'm currently in the 33% tax bracket and I have no idea what my tax bracket would be when I retire.

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    Default Re: Tax year IRA question

    Quote Originally Posted by Katrine View Post
    You must contribute to the SEP by December 31.

    For a Roth or Traditional IRA, you can contrib up to April, but the contributions will have counted for 2006, aka $4,000 total. As far as I know, it doesn't matter whether you use cash earned in 06 or 07 to fund it, its all a big pile of money....
    I had a bank account when I danced (you'd be surprised how many dancers don't) but I didn't do automatic withdrawals for my Roth.

    I would basically work my ass off for the six weeks before tax time to get my contribution for the year together. I always made it way before tax day, but I was erring on the side of caution.

    I have a SEP now (Roth's aren't allowed above a certain income bracket, and I'm above it) and I was a bit dismayed to find out you have until actual year's end to fund it. I'll have money in it, but not as much as I would have liked. Well, there's always next year...
    "She has written so well, and marvellously well, that I was completely ashamed of myself as a writer...But this girl, who is to my knowledge very unpleasant and we might even say a high-grade bitch, can write rings around all of us who consider ourselves as writers"

    Ernest Hemingway on writer, aviation pioneer and horse trainer Beryl Markham


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    Default Re: Tax year IRA question

    again, in regard to putting huge amounts of money into tax DEFERRED retirement accounts i.e. Conventional IRA's, 401k's, SEP IRA's etc. (not Roth), keep in mind that funds contributed to these accounts are pre-tax money with pre-tax earnings which count as taxable income at the time they are withdrawn. Thus hype by financial advisors that such accounts are 'tax-free' really means 'tax-free in the current year only'. Thus making huge contributions to these tax deferred retirement accounts is in essence a gamble that the tax rules which are in effect today will be worse than the tax / benefit rules that will apply when you retire and start withdrawing money to fund your retirement.

    However, because of the demographics re baby boomer retirements, there has already been a discussion of instituting 'means testing' of social security and medicare benefits in the future. In other words, in order to keep the SSI / medicare tax levels from going through the roof, the gov't would institute new rules stating that retirees who had saved lots of their own money would no longer receive a Social Security check and/or Medicare as they could afford to pay for their own retirement and medical care themselves. If this happens, it's possible that every additional dollar contributed to a retirement account will cost you a dollar in gov't benefits.

    Also, because of global competitiveness problems re countries in europe and asia that use a Value Added Tax, discussion has already taken place to institute such a tax here in the USA and to reduce income taxes accordingly. This could potentially result in money withdrawn from IRA's still being taxed as income, as well as IRA money being spent to cover costs of retirement being subject to a stiff VAT = national sales tax (the figure bandied about was 17&#37.

    The only point I'm trying to make here is that on a conceptual basis IRA's are similar to ARM's ... they looked like good deals at the time of inception because of the current tax / interest rate, but signing on the line obligates you to sticking with the program through 30 years of changing tax / interest rate conditions. At least with an ARM, when conditions turn unfavorable you have the opportunity to refinance - but there is no refinancing of an IRA without paying a fat penalty and an even fatter tax bill. Thus it makes some sense to keep the size of IRA contributions in proportion to the size of non-retirement investments, rather than putting 'all of your eggs' into a basket which the gov't still has a 'death grip' on due to the deferred tax liability.

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    Default Re: Tax year IRA question

    What Melonie said.

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
    "And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion

    Quote Originally Posted by Mia M
    If a cupcake was tossed at me... well, I'd only be upset if it missed my mouth

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    Featured Member Katherine's Avatar
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    Default Re: Tax year IRA question

    I agree! I'm investing in another fund as well at the moment, although I'm looking at that as a shorter term (vs retirement, so like 10/15 yrs) investment, I'm happy that I'm not throwing all my extra (well, not extra, I'm scrimping quite a bit over here), into just my retirement. Hell, I'll want extra money in my late 30's early 40's I bet!

    Side note:

    Hehe. It's become so much more of a thrill for me to see my bank balance go up than buying another pair of shoes!!

    Even though I've danced and done stuff in the past, I've never worked enough to garner an income. Just a couple grand a year. God bless parents. It's fun to be earning enough to pay taxes and invest what I work for... Well, ok. The taxes part isn't fun per se...

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    Default Re: Tax year IRA question

    What provider would you recommend for Roth 401(k) ? I was told that not all providers offer this plan because it's so new.

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    Default Re: Tax year IRA question

    Quote Originally Posted by xXx_stripper_xXx View Post
    What provider would you recommend for Roth 401(k) ? I was told that not all providers offer this plan because it's so new.
    Well, I wish I could recommend my company to you, but I would rather maintain my privacy and not disclose. But Fidelity is a decent shop with that option. Really, any financial services company can set one up for you (assuming they are offering them). Make sure you have a great deal of investment choice within them though, not just one fund family, for example.....

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
    "And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion

    Quote Originally Posted by Mia M
    If a cupcake was tossed at me... well, I'd only be upset if it missed my mouth

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    Default Re: Tax year IRA question

    Quote Originally Posted by xXx_stripper_xXx View Post
    What provider would you recommend for Roth 401(k) ? I was told that not all providers offer this plan because it's so new.
    I set up my Roth through Ameriprise Financial. They've always been pretty good, though you do have to be proactive at first about meeting with your advisor and outlining your financial goals.

    I've had 2 advisors through them (one in Maryland, the other in NYC) and the one in Maryland mostly tried to push VUL life insurance on me, which I didn't need in large part because I have no dependents, and the advisor knew that.

    My advisor in NYC is much better. She's very prompt about returning phone calls or e-mails if I have any questions and the portfolio she's set up for my retirement accounts has been returning around 25% this last year, which is excellent. However, I made it clear to her that I have a high risk tolerance since I'm young and have no dependents. She's invested mostly in emerging and foreign markets for me, which have been doing very, very well in the last year or two. Advisors always tell you "past performance is no indication of future results", which is true, but higher risk tolerance also involves being able to take some lows with the highs. Watch your statement each month, but don't freak out and sell if a stock dips for a month or two. Even if you don't have a high risk tolerance. Of course, if you're holding on to a stock or fund that continues to do pooorly don't keep hanging on to it. Talk to your advisor to discuss other options.

    I've also heard good things about Fidelity as well.
    "She has written so well, and marvellously well, that I was completely ashamed of myself as a writer...But this girl, who is to my knowledge very unpleasant and we might even say a high-grade bitch, can write rings around all of us who consider ourselves as writers"

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    Default Re: Tax year IRA question

    FYI, IRS Code: SIMPLE, and possibly SEP, must be setup by October of the year you are contributing for. Even if you are contributing up to April of the next year for current year.

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
    "And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion

    Quote Originally Posted by Mia M
    If a cupcake was tossed at me... well, I'd only be upset if it missed my mouth

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    Default Re: Tax year IRA question

    Fidelity is good, great customer service if you have any problems, but their fees are high. I would say best is Vanguard overall (very low fees), again just my opinion. Just be careful of the expense fee + account fee as they can take some of your earnings away.

    There are tons of articles out there about Fidelity vs Vanguard vs T.Rowe Price.

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    Default Re: Tax year IRA question

    But I still want to have my money grow tax free, not just tax deferred as in SEP IRA or regular 401(k). That's why I'm considering Roth 401(k). I'm currently in the 33% tax bracket and I have no idea what my tax bracket would be when I retire.
    Well, there IS a type of investment which is purchased with after tax money (like a Roth), where the earnings grow tax free (like a Roth), where 'withdrawls' are not counted as future income (like a Roth), but where there are no age restrictions or contribution limits. That investment, in fact, is not a retirement fund at all ... it's Municipal Bonds. Municipal Bonds are issued by state and local gov't agencies to raise money for public sector projects, and the earnings are exempt from federal tax. Also if you purchase a Muni Bond issued by your own state, the earnings will be exempt from state tax as well.

    The typical drawback to directly purchasing Muni Bonds is that the buy-in minimum amount can be rather high (from $5k to $100k). But for 'small investors', some of the mutual fund houses have packaged state specific muni bond mutual funds which can be bought by the share like stocks. For example 100 shares of Nuveen's NY muni bond fund can be bought for about $1100. Nuveen has 26 different state muni bond funds ( see ) , Fidelity has 12 different state muni bond funds with lower management fees ( see ) , Vanguard offers 10 state muni bond funds but the expense ratio is kind of high ( see ) , and Evergreen has 13 different state muni bond funds which have been the best performers on the market in recent months ( see )

    If you are in the 33% federal tax bracket, plus you live in a state which levees an additional state income tax, Muni Bond Funds may provide what you're looking for - a low risk investment with a relatively high 'after-tax' real rate of return. After all, if you're paying out 40% to federal and state income taxes combined, the after-tax earnings on a 4% Muni Bond Fund easily exceed the after-tax earnings of a 5.5% taxable investment.

    Obviously, the Muni Bond option doesn't allow for much in the way of diversification, but for that portion of your investment portfolio which you plan on allocating to low risk investments it's definitely worth checking out.

    ------------------------------------------------------------------------

    Another curious thought crosses my mind, which the accountants here at DD will have to offer an opinion on. Would it be possible to form a personal services C corp, have the C corp establish a Roth 401k plan for it's single 'employee', and then have the C corp make matching contributions to those made by the 'employee' ? If this is legal, then in effect wouldn't 50% of the money being contributed to the Roth 401k be pre-tax (i.e. an 'off the top' business expense for the C corp re the matching contribution ) ?

    ~
    Last edited by Melonie; 12-12-2006 at 04:00 PM.

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    Default Re: Tax year IRA question

    I've been meaning to do some research on these bonds. Thanks for the quick 101 course Mel!!!

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