SEP IRA vs. Traditional IRA

You may also consider other tax-deferral savings/investments besides IRA income-deferral instruments. IRAs where designed to phase out at about

90% income percential. Higher income people have to use these to maintain advised savings rates of 15% or more of income. Alternatives include income-deferral in insurance products called annuities. Theres a lot BS ones out there, but some of the bare-bones VAs from big brokerage houses may be worth it. You can also defer taxes by holding stocks, real estate, or collectables for decades. A stock index fund has the saftey of diversification with lower tax throw-offs of managed stock funds.

Notice I use the two terms "income-deferral" and "gains-deferral". Currently these are taxed at different rates with the latter being better. The history of the tax over the past several decades suggests tax policies change dramatically over time. So a second advantage of divesifying savings/investments is not put all your eggs in the same tax-basket, whatever it may be 20 or 50 years from now when you use your savings.

First answering the questions in a general sense. If you think are taxed now more than you will be taxed in retirement, 401K/IRA gives you a higher benefit than a Roth IRA. On the otherhand, they say don't put all your investments in one basket. Well take the same approach to tax shelters. Who knows what the future tax laws will look like? Perhaps it is a good idea to put some money in tax now and some in tax later and some in low-turnover tax every year.

In your specific case, your AGI is too high to qualify for a Roth IRA. $150K is the threshold for reduced contributions, $160K = zero. So the SEP IRA is your only option. SEP IRAs are grouped with traditional IRAs for many purposes including conversion to Roth IRA. The only limitation is your high AGI so you have to wait for 2010 for the Roth conversion AGI limit to disappear (unless the tax laws change again).

snipped-for-privacy@yahoo.com wrote:

Note that Solo Roth 401(k)s are available and would provide a post-tax, tax-advantaged option.

-Will

As I understand the OP and the tax rules (either of which could be wrong :-), the OP has maxed out employee contributions this year, and only employee (not employer) contributions can go into a 401(k) post-tax. So for this year, the OP could only add to the 401(k) as an employer (having maxed out as employee). These contributions would be post-tax, same as in a SEP.

On the plus side, the pre-tax employee contributions to a 401(k) (Roth or traditional, doesn't matter) would not have to be converted to a Roth IRA (pro-rata) when the OP converted his non-deductible IRA.

To be concrete, if the OP puts $2K into a SEP (pre-tax), and $4K into a non-deductible IRA, then when the Roth conversion is done, $2K out of $6K converted is taxable (assuming no gains). But if the OP puts the $2K into a

401(k), it is not eligible for Roth conversion, and no tax is due. (Of course, only $4K gets converted this way.)

I'm not entirely sure about the rules on SEPs being treated the same as other IRAs (especially regarding conversions, though I know they can be converted to Roths), so please correct as needed.

Mark Freeland snipped-for-privacy@sbcglobal.net

Mark,

Please clarify "maxing out" your employer plan. Are you limited by being a highly compensated employee? How old are you?

I assume you mean that you are contributing either 15k or 20k based on your age.

Thanks for the advice. Your assumptions are correct. So in the long run, would the SEP converted into the Roth but taxed be better than the solo 401(k) no tax but no Roth conversion. Or vice-versa? Would the gain the SEP be taxed if converted to a Roth? Since I'm a newbie, I assume that the OP is me, but what does OP stand for anyway?

yup, it's you.

OP = "original poster"

if you google for something on the order of "newsgroup acronyms" you'll find sites, like this one:

list commonly, and uncommonly, used abbreviations. albert

Yes, I'm dropping 15k since I'm only 34.

A solo roth 401(k) seems interesting but why do none of the major brokerages offer it? I amy just open the SEP IRA this year for pre-tax deduction and open a solo roth 401(k) next year. Does this make sense?

2006 was the first valid year for this account. The law was set to expire into 2010 until it was made permanent three months ago. So I'm guessing the big boys were sitting on the sidelines until the dust settled.