I'm self employed, sole proprietor, husband/wife, no corp or LLC. We put our max (25%?) into a SEP about $8,000 each. Can we also put money into an IRA or Roth IRA? I'm 59, my wife is 55. Some recent internet research says we can, but 8 years with my accountant and I never heard about it. I plan on retiring at 62, but probably won't draw SS yet. Wife will still continue running business. If yes, would you recommend traditional or Roth.
Are there other retirement plans I could/should use?
Yes, you can put money into both a SEP-IRA and an individual IRA that is traditional or Roth. Whether you are eligible to put money into a traditional and/or Roth depends on your income level. You could theoretically put money into both a traditional and Roth, but the total amount put into the two types cannot exceed $5500 each, or $6500 each if you're over 50 years old (which it sounds like both of you are). The $6500 limit applies only to Roth and traditional IRAs and should not be confused with the separate limit for SEP-IRA contributions.
SEP and traditional IRAs save you income taxes in the short term as you are basically getting a deduction for putting money into them. Roth IRAs save you taxes in the long term and you don't pay income tax on the increased value and income growth of the Roth IRA when you start making withdrawals from it. For this reason, most people agree that Roth IRAs are better.
I have no issues with Chris Johnson's answer, but there are unanswered questions due to the fact statement. MikeK stated that he was "self-employed, sole proprietor, husband/wife" and they each contributed "our max (25%?) into a SEP about $8000 each". In order for both of them to contribute to a SEP-IRA as stated, they both would have had to either
made the election with the IRS to operate the business as a qualified joint venture. The business income and expenses get split equally and recorded on their separate Schedule Cs and SE tax is computed on separate Schedule SEs. or
The owner hired the spouse as an employee with a W-2 and made the max contribution. The employee would report wages on Line 7 of a separate or joint tax return. If none of the above is true, then they have a partnership and should be filing partnership income tax returns.
Additionally, a SEP-IRA is a qualified plan. As such, in order to deduct a contribution to a traditional IRA the husband and wife would have to consider the limitation rules for individuals who are covered by a retirement plan at work.
Lastly, if the SEP-IRA plan is written properly, it can allow for traditional IRA contributions to be made in addition to the SEP-IRA contributions.
We have separate Schedule Cs and SE tax, whether we made a formal election with the IRS to operate the business as a qualified joint venture, I don't recall (I don't thin so), but, we have been doing the
1040 forms like that for at least 8 years. This is probably the last year with this accountant, we are big savers and it seems we could have had another $60k or $70 in tax deferred accounts if I had known. Would you make this known to your client if every year you told him max out the SEP? I recall one year I told him he left it about $1,000 short between our two SEPs.
I don't think limitations will hit us, we usually hit around $80k before adjustments. (SEPs and HSA about $22k)
I don't know what written properly means, I simply opened SEPs with Vanguard. We do have IRAs with Vangaurd also. I'm starting to feel we should have had a tax planner about 12 years ago with an accountant. Getting late in the game now, I hope to retire at 62.
You made the election when you filed a joint 1040 and split the income and expenses 50:50 and filed separate Schedule Cs.
A SEP-IRA is a qualified plan. As such, it must be in writing and conform to IRS regulations. The regulations allow for an individual to make traditional IRA (non-SEP) contributions to their SEP account as long as the written plan document has a clause that allows it. Not all plan trustees allow it. I don't know about Vanguard.
You are assuming that year-to-year income tax tactics are the driving force behind your financial well-being. I'd say, probably not.
Hindsight is quite valuable, except when it's not. If you could now find that "accountant" (definition varies according to state law), what would you tell him or her to use for the forecast bank savings 1-yr CD rate, say, 3 years from now? That would be a starting point for determining the net present value of current year tax deferrals.
Pre-tax retirement accounts are not always the best choice, nor are Roth accounts. I recommend some diversity among several types of accounts.
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