SEP plan for side business?

Yes.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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Is my yearly contribution limit still 25% of my business income ( i.e

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How is your business structured? If it is a sole proprietorship, the limit is actually 20% of your net business income (net business income is Sched C profit minus half the SE tax), not 25%. (Well technically it's 25%, but it's 25% of Sched C profit minus half the SE tax minus the SEP contribution itself. When you work out the recursion, it turns out to make the nominal 25% limit an actual 20% limit).

Your 401(k) contributions as an employee have no effect on SEP contributions.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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Are you sure about this? Pub. 560 seems to disagree, see the "More than one plan." paragraph (third column, pg. 6, 2007 Pub. 560). But perhpas I'm missing something?

-Will

william dot trice at ngc dot com

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That's talking about employER contributions. EmployEE salary deferrals don't figure into the calculation in question.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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So does that then open up interesting possibilities for the self-employed? For example, maybe I have one business that's insurance planning and another that's investment advice. For one I treat myself as an employee and contribute to a solo-401(k), for the other I open a SEP. Does this work? Can I do this with a third business, like tax prep? (Here I'm assuming that all three businesses would be related but not enough so that the IRS could say that they're a single business). All subject to receiving enough income, of course.

-Will

william dot trice at ngc dot com

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It works, but I believe there's an integrated limit across all your business ventures. The total "employer" contribution to all your solo 401(k)s/SEPs can't be more than around $46,000 (I don't remember the exact 2008 number).

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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It doesn't work as well as truly separate employers would work - there's no advantage to creating separate plans. There's a common control/ownership test where multiple "employers" are considered a single one for contribution purposes when they exceed ownership-percentage levels. Certainly a sole pro who wears two or three hats fails that test.

The better scenario is a day-job 401k with moonlighting on the side, so they're truly separate employers...the latter could have its own SEP-IRA or solo-k. The "separate employer" principle says each has its own contribution limit, though the $15,500 "salary deferral" limit applies across all plans in aggregate.

This gets complicated depending on what types of plans are in the mix, the IRS pub on the topic addresses it. Nolo press used to have a great book too but it's out of print -- I emailed them about that, they said they didn't sell enough of them. Strange to me...so many sole-pros out there, but a guide about setting up a retirement plan (a complicated topic, addressed very well) didn't sell. While they're able to sell, you know "dog law" and titles like that!

-Tad

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