SEP IRA

Posts Tagged ‘taxes’

Question: Tax regarding contract income and business loss?

I work in a contract positions and will make 90K , i was planning to put in 20% ie 18K in SEP IRA .
I also have a startup business this year , which generated 40K in capital losses.

I have 2 questions–
1) Can i use my capital losses to reduce my total income { 90K-40K = 50K}
2) The 20% limit for SEP IRA is for my self employed income only or since i may have a loss for the leftover income( ie is it 20% of 90K or 20% of 50K)

Thanks a lot.

Answer: I think you have some confusion about the startup business.

“Capital loss” is only possible on the disposition of a “capital asset”. Using the word “generated” makes it sound like what you have is an operating loss. That’s actually good news for you. Capitial losses can only offset cap. gains plusanother $3k of ordinary income. This operating loss is ordinary, meaning that you are not limited (unless other limitations apply such as passive loss or at-risk limitations).

Now, before you do a happy dance you have probably not figured the loss correctly. You must distinguish between start up costs ( money spent getting ready to open the doors) and operating expenses incurred once you are in biz. Start up costs must be amortizwed ( you can elect to expense up to $5000 of start up costs) but you must amortize the excess above $5000 over a 15 year period.

SEP-IRAs are set up on a per business basis. If youv had employees in one biz, it is not right that they be shorted because you lost $$ in another biz. This is true even though you have no employees.

Also, even though you will net your bottom lines for SE tax , you must figure SE tax on the SEP IRA biz only and reduce net income by half of SE tax before applying the 20%.

Good luck.

Self-Employed? How to Save

Question: Opened new Sim IRA for rollover from empl retiremnt plan Did not roll Get mnthly chk How use IRA?

Married Age 58 Husband self employed No retirement Plan
Did not deposit anything into the SIMPLE IRA when I opened it in January 2007. So it sits there with a zero balance. Should I put in after tax dollars from my pension check? Before Tax dollars from husbands business? Can I use it at all?

Answer: after tax money out of you check!!!

Question: What should I invest in besides an IRA?

I already have a Roth IRA with mutual funds between American Balanced Fund and Vanguard Star (balanced) Fund with about 15K between the two. Next year I am no longer going to contribute to the American Fund because of the loads and instead put that $$ into Vanguard’s 2035 Target Retirement Fund, which is more stock oriented rather than balanced. I am 36 years old.

What is another thing I should be investing in for the long term (not an IRA unless a SEP-IRA) that would be “tax friendly”? Maybe a tax-managed fund? I don’t have the option of a 401k. Part of my income comes from self employment, that’s why I was considering a SEP-IRA. Any specifics regarding a good tax-managed fund though? Thanks

Answer: You should first choose a tax sheltered option such as a SEP-IRA and maximize your Contribution to that account. Because your investment grows tax deferred, you need not worry about tax efficiency and simply focus on lower costs. Vanguard 2035 Target Retirement Fund sounds good because of its low cost structure and it automatically rebalances as you approach your retirement age.

Beyond that, if you want to save in a non-tax sheltered account (i.e. taxable account), then there are tax managed separate accounts, but those are expensive and would make sense only for high-networth individuals. So, I would recommend low cost index mutual funds or ETFs. ETFs are more tax efficient than mutual funds. You could also include some municipal bond funds in your portfolio as the interest income is tax free. If you invest in munis from your state, you also get shelter from state taxes.