Roth IRA Contribution Income Requirements, SEP IRA Restrictions Highlight Mailbag | Ed Slott and Company, LLC

Roth IRA Contribution Income Requirements, SEP IRA Restrictions Highlight Mailbag

By Marvin Rotenberg, IRA Technical Expert

This week's Slott Report Mailbag includes questions (and our answers) on the income requirements for a Roth IRA contribution, SEP IRAs and governmental 457(b) plans. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


Is a monthly retirement check considered income in order to open a Roth IRA? 

An IRA contribution must be based on the taxable compensation of the individual for the year of the contribution. Pension, profit sharing or IRA distributions are not considered compensation for the purpose of a contribution to an IRA. Here is a Q&A article we did on Roth IRA and IRA contributions.


Dear Ed Slott Team:

I have some questions about SEP contributions.

 I'm a self-employed sole proprietor, and I recently established a SEP IRA. I've not yet funded it.

My questions:

1. My maximum contribution rate (according to those in charge) is 0.20 of my self-employed income. Call that number "A."

 In IRS Publication 560, the contribution rate to determine my deduction is 0.166667 of my net profit (less self-employment tax). Call my maximum federal deductible SEP contribution number "B."

So, I can put "A" in my SEP, but the maximum I can deduct on my 2012 Form 1040 is "B," correct?

2. I have two traditional IRAs, and currently my maximum contribution is $5,000 annually.

May I still contribute that $5K across my two traditional IRAs while putting "A" in my SEP?

 Or, if I want to put that $5K in my traditional IRAs, must I deduct that $5K from "A"?

 Or, if I fund my SEP with “A,” is that all the IRA funding I can do for 2012 (as a self-employed person) and I cannot contribute anything to my traditional IRAs?


Scott Bowen

You should check with a tax professional on the actual amount you can contribute to the SEP plan. SEP contributions cannot be after-tax amounts. All the money that goes into a SEP plan is from an employer.

Even though you are a participant in a company sponsored plan (this includes SEP and SIMPLE IRAs) you can contribute to an IRA. Whether it will be tax deductible would depend on the amount of compensation you have in the year of the contribution. The phase-out ranges for IRA deductibility in 2012 are as follows (find our more 2012 IRA and tax planning info here).

Married filing jointly $92,000 - $112,000
Single or head of household $58,000 - $68,000
If you file separate, your phase out range is $0 - $10,000.

You can always make a non-deductible contribution to an IRA based on earned income in the year of the contribution.


Dear Ed Slott,

My name is Howard Friedman. I have a 457(b) as part of a volunteer
fire department one- time payout for years of service.
 The money is held at a NY insurance company. I am able to do a lump sum distribution as of April 1, 2012.
 Can I roll this over without any tax consequences? Any help you could give me would be appreciated.

I assume you are referring to a governmental 457(b) plan. Generally if you are entitled to a lump sum distribution, you have the option to roll it over into an IRA and avoid paying current income tax on the distribution. Please check the Summary Plan Description or the notice you received upon your request for a distribution as those will outline your options.

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