Warning!!!!

It came to our attention this past tax season that a rule changed recently with respect to people who have 403b plans and also want to contribute to a SEP. Basically, there is a $49k annual maximum that an employee can have contributed into a retirement plan on their behalf during the year. This includes employer contributions and employee contributions (but excludes the $5.5k catch-up contribution for people 50 and older).

Somehow, the rules were changed and written in such a way that there is confusion as to whether you need to combine your SEP and 403b accounts when figuring out when you hit the $49k max. So if you work for a hospital that makes their contributions into your 403b account, and you hit the $49k max between your salary deferrals and the employer contributions, then you might not be entitled to contribute to a SEP that year.

Please note that some hospitals contribute to a 401 account for their staff, and others contribute to a pension plan. So if you have a 403b account for your salary deferrals, you can't be certain that your employer is also contributing to your 403b account. The only way to find out is to ask the benefits department at your hospital.

As I said, this rule is poorly written, and there has not been any definitive guidance issued from the IRS. But it is an issue you should be aware of in the event you are having $49k put away on your behalf through the hospital's 403b plan, and you have self-employment income and want to max out your SEP.

More to come......

Zip Code: 01801

Andrew,

First, thanks for all of your contributions to this board. Great resource and you are very patient and helpful with answers. Thanks!

Now, couple of questions. I know you can't give specific tax advice, but I will try to give you as much info to help you answer my question. Here is my situation: for 2010, i have no employer sponsored retirement plan. Wife works as an indepent contractor. our combined salary is above 300000 (basically above any threshold for most tax breaks etc.) the vast majority of that is my salary. now, here are my issues:

i know that as my wife and i don't have employer sponsored retirement plans, we can contribute to a traditional IRA and have it actually be deducted regardless of income. we have been contributing to nondeductible IRAs for the past few years, and our plan is to convert to ROTH this year the nondeductible amounts. should i contribute 5000 and 5000 (wife and me) to nondeductible and "convert" it? or should we use the tax deduction this year (i.e. 10000 tax break). also, given that wife is independent, and let say makes 5000... can she also contribute to a SEP IRA at the same time? would that be deductible or would it be a nondeductible contribution? how much would she be able to contribute (percentage?)? is there a contribution limit meaning that we can't contribute to SEP and a regular IRA?

hope i gave you enough info. thank you in advance!

Zip Code: 10020

Hi,

This is an interesting question. I think the easier answer is to start with the SEP contribution. If your wife contributes to a SEP, then she will considered covered under a retirement plan of the year. With income of $300k, that will make both of your $5k IRA contributions as non-deductible, which will reduce your tax bill when you convert.

If she doesn't contribute to a SEP, then I think your $10k contributions will be deductible as an adjustment to income on your federal tax return. When you covert, you will then report that $10k as income on the IRA distribution line. Since the $10k of income will be offset by the $10k of deduction, it will be as if the IRA contributions were non-deductible. Please note that this will only work out like this if you make the deductible IRA contribution and convert it to a Roth IRA for the same tax year.

Zip Code: 01801