Roth Phaseout

[Corduroy Frog]

Struggling with a client who wants to contribute to a ROTH, and borderline to possible phaseout.

The phaseout worksheet, so long as the $230,000 threshhold (MFJ) is not exceeded, allows $7000.  However, from the $7000 the taxpayer must subtract amounts for "other IRAs"

There is no contribution for an IRA, but there is for a self-employed SEP.  When the instructions refer to "other IRAs" does this mean strictly IRAs, or do they really mean IRAs to include SEPs?

They have no IRAs, but Drake is subtracting SEPs.  Is this correct?

Thank you in advance.

 

[jklcpa]

First, to state the obvious, a SEP is a type of IRA that employers contribute to, and plans may allow employee contributions to it.  Then,

Because you say this is a self-employed SEP:  this would be used for those businesses reporting on Sch C (sole props, disregarded entities) or partnerships on Sch E, and those contributions are considered contributions by the individual and are reported as an above-the-line deduction that comes from line 16 of Schedule 1, and that is why it is being factored in on the Roth limitation worksheet.  Does the return have an entry on that line?

It would be different if your client was a W-2 employee of his own company (a C or S corp):  employer contributions would not be taken into account for the limitation you asked about, but if client as the employEE contributed to the employer plan, then those would factor in to the Roth limitation.

[Corduroy Frog]

16 minutes ago, jklcpa said:

 this would be used for those businesses reporting on Sch C (sole props, disregarded entities) or partnerships on Sch E, and those contributions are considered contributions by the individual and are reported as an above-the line deduction that comes from line 16 of Schedule 1, and that is why it is being factored in on the Roth limitation worksheet.  Do the return have an entry on that line?

Thank you.  Client is an LLC, disregarded entity choosing to file as a partnership.  And yes, Drake is forcing an entry on line 16 of Schedule 1.  Research from IRS Pub 590-A states specifically "IRA" and does not include SEP in the language.  Apparently the pervasive feeling is that the language implies SEP should be included, and Drake has decided that as well.

The language would be less confusing if all manner of deferred retirement plans were stated, but that is not the case.  Even the IRS has not so stated.

Thanks again Judy.  Others who have viewed the question have not opted with an opinion and I don't blame them.

 

[jklcpa]

1 hour ago, Corduroy Frog said:

Client is an LLC, disregarded entity choosing to file as a partnership.  And yes, Drake is forcing an entry on line 16 of Schedule 1. Research from IRS Pub 590-A states specifically "IRA" and does not include SEP in the language.  Apparently the pervasive feeling is that the language implies SEP should be included, and Drake has decided that as well.

Well, Drake is handling it properly, and I wouldn't consider that to be forcing anything or arriving at a conclusion based on anything implied or pervasive feelings. 

You might consider IRC sec 408(k) that clearly defines a SEP as an IRA.    

 

[kathyc2]

1 hour ago, Corduroy Frog said:

Thanks again Judy.  Others who have viewed the question have not opted with an opinion and I don't blame them.

Maybe because your question is clear as mud?  

The combination of Traditional IRA's and Roth can not exceed 7,000 (8,000).

Having a SEP, SIMPLE, etc does not affect Trad/Roth as long as earned income is sufficient to cover both and MAGI is low enough that phaseouts aren't in play. 

[jklcpa]

6 minutes ago, kathyc2 said:

Maybe because your question is clear as mud?  

The combination of Traditional IRA's and Roth can not exceed 7,000 (8,000).

Having a SEP, SIMPLE, etc does not affect Trad/Roth as long as earned income is sufficient to cover both and MAGI is low enough that phaseouts aren't in play. 

Right Kathy, the question was really about the total contributions to all IRAs, and the self-employed SEP contribution is considered to be made by the individual himself, not the employer.

[Corduroy Frog]

Thank you.  Putting numbers into this scenario.

SEP $13,800 apiece for husband/wife partners, Total SEP $27600 if they choose, and doing so means they can't have a Roth.

But their total (modified) AGI is $228,000 which is under the $230,000 which by its own merit would allow a $7000 Roth if no SEP,.

But if no SEP, their AGI rises to $245,600 ($228,000 + $27600) and the absolute phaseout for allowing a ROTH is $240,000.

So either decision they choose results in no Roth.

[kathyc2]

5 hours ago, Corduroy Frog said:

Thank you.  Putting numbers into this scenario.

SEP $13,800 apiece for husband/wife partners, Total SEP $27600 if they choose, and doing so means they can't have a Roth.

But their total (modified) AGI is $228,000 which is under the $230,000 which by its own merit would allow a $7000 Roth if no SEP,.

But if no SEP, their AGI rises to $245,600 ($228,000 + $27600) and the absolute phaseout for allowing a ROTH is $240,000.

So either decision they choose results in no Roth.

While Traditional IRA is an adjustment item for AGI to MAGI, SEP is not.  Nothing of the numbers you presented preclude Roth contributions.  

https://www.irs.gov/e-file-providers/definition-of-adjusted-gross-income

[Lee B]

7 hours ago, Corduroy Frog said:

Thank you.  Putting numbers into this scenario.

SEP $13,800 apiece for husband/wife partners, Total SEP $27600 if they choose, and doing so means they can't have a Roth.

But their total (modified) AGI is $228,000 which is under the $230,000 which by its own merit would allow a $7000 Roth if no SEP,.

But if no SEP, their AGI rises to $245,600 ($228,000 + $27600) and the absolute phaseout for allowing a ROTH is $240,000.

So either decision they choose results in no Roth.

It would have been helpful, if your  original post had included these numbers.

[jklcpa]

2 hours ago, kathyc2 said:

While Traditional IRA is an adjustment item for AGI to MAGI, SEP is not.  Nothing of the numbers you presented preclude Roth contributions.  

https://www.irs.gov/e-file-providers/definition-of-adjusted-gross-income

That's true, but where this taxpayer is losing the ability to contribute to the Roth isn't in the AGI/MAGI computation. It is because the self-employed SEP IRA contributions on Sch 1, line 16 are flowing to the IRA limitation worksheet itself, specifically line 9 that says "Enter Contributions for the Year to Other IRAs".

[TexTaxToo]

22 hours ago, Corduroy Frog said:

Research from IRS Pub 590-A states specifically "IRA" and does not include SEP in the language.  Apparently the pervasive feeling is that the language implies SEP should be included, and Drake has decided that as well.

The language would be less confusing if all manner of deferred retirement plans were stated, but that is not the case.  Even the IRS has not so stated.

I think it's pretty clearly stated in the regs https://www.law.cornell.edu/cfr/text/26/1.408A-8

Quote

(2) Traditional IRA. The term traditional IRA means an individual retirement account or individual retirement annuity described in section 408(a) or (b), respectively. This term includes a SEP IRA but does not include a SIMPLE IRA or a Roth IRA.

And the limits as stated in the regs https://www.law.cornell.edu/cfr/text/26/1.408A-3 refer to reducing by amounts contributed to traditional IRAs (as defined above).

(But SEP/SIMPLE plan contributions are not included in the MAGI calculation.)