Deducting SEP-IRA contributions as a sole proprietor with no employees
SEP IRA deduction goes to line 28 of your 1040, which is above the line (i.e.: pre-AGI). It should not be included in your taxable income (AGI) for Federal purposes.
You can contribute to both but the total contribution is capped: More than one plan. If you contribute to a defined   contribution plan (defined in chapter 4),   annual additions to an account are limited to the   lesser of $53,000 or 100% of the participant's   compensation. When you figure this limit, you   must add your contributions to all defined contribution   plans maintained by you. Because a   SEP is considered a defined contribution plan   for this limit, your contributions to a SEP must   be added to your contributions to other defined   contribution plans you maintain. Source: https://www.irs.gov/pub/irs-pdf/p560.pdf on page 6. The law says that you cannot make a contribution (whether tax-deductible or not) to a Traditional IRA for any year unless you (or your spouse if you are filing a joint tax return) have taxable compensation (income earned from the sweat of your brow such as wages, salary, self-employment income, commissions on sales, and also alimony or separate maintenance payments received under a divorce decree, etc) during that year, and you will not be 70.5 years old by the end of the year for which you are making the contribution. The contribution, of course, can be made up to Tax Day of the following year, and is limited to the lesser of the total compensation and $5500 ($6500 for people over 50).  Assuming that you are OK on the compensation and age issue, yes, you can make a contribution to a Traditional IRA for an year in which you take a distribution from a Roth IRA. Whether you can deduct the Traditional IRA contribution depends on other factors such as your income and whether or not you or your spouse is covered by a workplace retirement plan. Very grey area. You can't pay them to run errands, mow the lawn, etc. I'd suggest that you would have to have self employment income (i.e. your own business) for you to justify the deduction. And then the work itself needs to be applicable to the business. I've commented here and elsewhere that I jumped on this when my daughter at age 12 started to have income from babysitting. I told her that in exchange for her taking the time to keep a notebook, listing the family paying her, the date, and amount paid, I'd make a deposit to a Roth IRA for her.  I've approaches taxes each year in a way that would be audit-compliant, i.e. a paper trail that covers any and all deductions, donations, etc. In the real world, the IRS isn't likely to audit someone for that Roth deposit, as there's little for them to recover. Traditional IRA contributions can be made if you  have compensation and the amount of the contribution is limited to the smaller of your compensation and $5500 ($6000 if age 50 or more). Note that compensation (which generally means earnings form working) is not just what appears on a W-2 form as salary or wages; it can be  earnings from self-employment too, as well as commissions, alimony etc (but not earnings from property, pensions and annuities, certain types of partnership income) You must also not have attained age 70.5 in the year for which the contribution is made.  Even if you don't have any compensation of your own, you can nonetheless make a Traditional IRA contribution if your spouse has compensation as long as you are filing a joint tax return with your spouse. For spouses filing a joint return, the  limits are still the same $5500/$6000 for each spouse, and the sum total of Traditional IRA contributions for both spouses also must not exceed the sum total of earned income of both spouses. The age limits etc are all still applicable. Note that none of this says anything about whether the contributions are deductible.  Everyone meeting the above requirements is eligible to make contributions to a Traditional IRA; whether the contributions can be deducted from current income depends on the income:  those with high enough incomes cannot deduct the contribution. This is different from Roth IRAs to which people with high incomes are not permitted to make a contribution at all. Finally, the source of the cash you contribute to the IRA can be the proceeds of the stock sale if you like; you are not required to prove that the cash received from compensation is what you sent to the IRA custodian. Read Publication 590 (available on the IRS website www.irs.gov) if you need an authoritative reference. "If you start an LLC with you as the sole member it will be considered a disregarded entity.  This basically means that you have the protection of being a company, but all your revenues will go on your personal tax return and be taxed at whatever rate your personal rate calculates to based on your situation.  Now here is the good stuff.  If you file Form 2553 you can change your sole member LLC to file as an S Corp.  Once you have done this it changes the game on how you can pay out what your company makes.  You will need to employ yourself and give a ""reasonable"" salary.  This will be reported to the IRS and you will file your normal tax returns and they will be taxed based on your situation. Now as the sole member you can then pay yourself ""distribution to share holders"" from your account and this money is not subject to normal fica and social security tax (check with your tax guy) and MAKE SURE to document correctly.  The other thing is that on that same form you can elect to have a different fiscal year than the standard calendar IRS tax year.  This means that you could then take part of profits in one tax year and part in another so that you don't bump yourself into another tax bracket.  Example:  You cut a deal and the company makes 100,000 in profit that you want to take as a distribution.  If you wrote yourself a check for all of it then it could put you into another tax bracket.  If your fiscal year were to end say on sept 30 and you cut the deal before that date then you could write say 50,000 this year and then on jan 1 write the other check." "Summary: It's because you are effectively contributing more money in the second case, so you have more money at the end.  The effect of being covered by an employer retirement plan (in the case of a 401(k), that means either you or your employer contributed to it during the year) is that it prevents you from deducting Traditional IRA contributions unless your income is below a very low level (for Single filing status, it phases out at an MAGI of between $62k and $72k). Since you are unable to deduct the Traditional IRA contribution, but you entered that you are still making the full $5500 contribution every year, that means you are making a non-deductible contribution of $5500 every year instead of a deductible contribution. Nondeductible contributions are ""after-tax"", whereas deductible contributions are ""pre-tax"" (because your taxable income is reduced by the amount of the contribution, so you effectively don't pay income tax on the income you used to contribute). $1 of pre-tax money is not the same as $1 of after-tax money. If your marginal tax rate is 25%, then $1 of pre-tax money is equivalent to $0.75 of after-tax money. However, since in both cases you are putting in the same nominal amount of contribution ($5500), but one is pre-tax and one is after-tax, in the after-tax case you are effectively contributing more money, i.e. more money is taken out from your bank account that year. The $5500 pre-tax contribution is equivalent to only $5500 * 0.75 = $4125 after-tax, i.e. you are only short $4125 from your bank account at the end of the year after making a $5500 deductible contribution, whereas you are short $5500 after making a $5500 non-deductible contribution, so it's not a fair comparison. The non-deductible Traditional IRA contributions are not taxed when withdrawn (though the earnings earned from those contributions are still taxed), so that's why you are left with a greater amount. This is a similar situation to what happens when you try to compare a $5500 deductible Traditional IRA contribution to a $5500 Roth IRA contribution -- it will look like the Roth IRA case leaves you with much more money, but that's again because you are effectively contributing more money, because the Roth IRA contribution is after-tax, so it's not a fair comparison. (The Roth IRA case will produce a much greater ""advantage"" than the non-deductible Traditional IRA contribution case, because for a Roth IRA, both the contributions and earnings will not be taxed at withdrawal.)" "This seems to depend on what kind of corporation you have set up. If you're set up as a sole proprietor, then the Solo 401k contributions, whether employee or employer, will be deducted from your gross income.  Thus they don't reduce it. If you're set up as an S-Corp, then the employer contributions, similar to large employer contributions, will be deducted from wages, and won't show up in Box 1 on your W-2, so they would reduce your gross income.  (Note, employee contributions also would go away from Box 1, but would still be in Box 3 and 5 for FICA/payroll tax purposes). This is nicely discussed in detail here. The IRS page that discusses this in more (harder to understand) detail is here. Separately, I think a discussion of ""Gross Income"" is merited, as it has a special definition for sole proprietorships. The IRS defines it in publication 501 as: Gross income.    Gross income is all income you receive in the form of money, goods, property, and services that is not exempt from tax. If you are married and live with your spouse in a community property state, half of any income defined by state law as community income may be considered yours. For a list of community property states, see Community property states under Married Filing Separately, later. Self-employed persons.    If you are self-employed in a business that provides services (where products are not a factor), your gross income from that business is the gross receipts. If you are self-employed in a business involving manufacturing, merchandising, or mining, your gross income from that business is the total sales minus the cost of goods sold. In either case, you must add any income from investments and from incidental or outside operations or sources. So I think that regardless of 401(k) contributions, your gross income is your gross receipts (if you're a contractor, it's probably the total listed on your 1099(s))." "It seems I can make contributions as employee-elective, employer   match, or profit sharing; yet they all end up in the same 401k from my   money since I'm both the employer and employee in this situation. Correct. What does this mean for my allowed limits for each of the 3 types of   contributions? Are all 3 types deductible? ""Deductible""? Nothing is deductible. First you need to calculate your ""compensation"". According to the IRS, it is this: compensation is your “earned income,” which is defined as net earnings   from self-employment after deducting both: So assuming (numbers for example, not real numbers) your business netted $30, and $500 is the SE tax (half). You contributed $17.5 (max) for yourself. Your compensation is thus 30-17.5-0.5=12. Your business can contribute up to 25% of that on your behalf, i.e.: $4K. Total that you can contribute in such a scenario is $21.5K. Whatever is contributed to a regular 401k is deferred, i.e.: excluded from income for the current year and taxed when you withdraw it from 401k (not ""deducted"" - deferred)." "Not really, no. The assumption you're making—withdrawals from a corporation are subject to ""[ordinary] income tax""—is simplistic. ""Income tax"" encompasses many taxes, some more benign than others, owing to credits and exemptions based on the kind of income. Moreover, the choices you listed as benefits in the sole-proprietor case—the RRSP, the TFSA, and capital gains treatment for non-registered investments—all remain open to the owner of a small corporation ... the RRSP to the extent that the owner has received salary to create contribution room. A corporation can even, at some expense, establish a defined benefit (DB) pension plan and exceed individual RRSP contribution limits. Yes, there is a more tax-efficient way for small business owners to benefit when it comes time to retirement. Here is an outline of two things I'm aware of: If your retirement withdrawals from your Canadian small business corporation would constitute withdrawal from the corporation's retained earnings (profits), i.e. income to the corporation that had already been subject to corporate income tax in prior years, then the corporation is able to declare such distributions as dividends and issue you a T5 slip (Statement of Investment Income) instead of a T4 slip (Statement of Remuneration Paid). Dividends received by Canadian residents from Canadian corporations benefit from the Dividend Tax Credit (DTC), which substantially increases the amount of income you can receive without incurring income tax. See TaxTips.ca - Non-eligible (small business) dividend tax credit (DTC). Quote: For a single individual with no income other than taxable Canadian   dividends which are eligible for the small business dividend tax   credit, in 2014 approximately $35,551 [...] could be earned before   any federal* taxes were payable. * Provincial DTCs vary, and so combined federal/provincial maximums vary. See here. If you're wondering about ""non-eligible"" vs. ""eligible"": private small business corporation dividends are generally considered non-eligible for the best DTC benefit—but they get some benefit—while a large public corporation's dividends would generally be considered eligible. Eligible/non-eligible has to do with the corporation's own income tax rates; since Canadian small businesses already get a big tax break that large companies don't enjoy, the DTC for small businesses isn't as good as the DTC for public company dividends. Finally, even if there is hardly any same-year income tax advantage in taking dividends over salary from an active small business corporation (when you factor in both the income tax paid by the corporation and the individual), dividends still allow a business owner to smooth his income over time, which can result in a lower lifetime average tax rate. So you can use your business as a retained earnings piggy bank to spin off dividends that attract less tax than ordinary income. But! ... if you can convince somebody to buy your business from you, then you can benefit from the lifetime capital gains exemption of up to $800,000 on qualifying small business shares. i.e. you can receive up to $800K tax-free on the sale of your small business shares. This lifetime capital gains exemption is a big carrot—designed, I believe, to incentivize Canadian entrepreneurs to develop going-concern businesses that have value beyond their own time in the business. This means building things that would make your business worth buying, e.g. a valued brand or product, a customer base, intellectual property, etc. Of course, there are details and conditions with all of what I described, and I am not an accountant, so please consult a qualified, conflict-free professional if you need advice specific to your situation." Does the 457(b) plan allow for the rollover of other retirement funds into it? And do you have very specific reasons for wanting to roll over your SEP-IRA into the 457(b) plan instead of into some other IRA plan with a different custodian? For example, if you already have a Traditional IRA, is there any reason why your SEP-IRA should not be rolled over into the Traditional IRA? With regard to the question about separate accounts, once upon a time, rolling over money from an employment retirement plan (e.g. 401k) into a Traditional IRA required establishing a separate account called a Rollover Traditional IRA so that the rolled-over money (and the earnings thereon) were not commingled with standard traditional IRA money resulting from personal contributions). This was so that the account owner had the option of rolling over the separately kept money into a new employer's retirement plan (if such a rollover was permitted by the new 401k plan). If one did not want to ever roll over money into a new employer plan, one had to write a letter to the custodian telling them that commingling was OK; you never wanted to put that money into another 401k plan. The law changed some time later and the concept of Rollover IRAs holding non-commingled funds has disappeared.  With that as prologue, my answer to your question is that perhaps the law did not change with respect to 457(b) plans, and so the money that you want to rollover into the 457(b) plan needs to be kept separate and not commingled with your contributions via payroll deduction to the 457(b) plan (in case you want to ever roll over the SEP-IRA money into another SEP-IRA). Hence, separate accounts are needed: one to hold your SEP-IRA money and one to hold your contributions via payroll deductions. "First, to clear up your misconceptions: The balance is not merely made up of deductible and non-deductible contributions.  There are also earnings implied in the balance .. i.e. the whole reason you invest in the first place is to realize some return on investment.  That return, a.k.a. the earnings, are included in the balance of the account.  The balance is the sum total of everything in the account, the ""bottom line"". Generally speaking, basis for an account is all of the money that has been contributed (deposited) to the account.  In the context of an IRA as described in the article, however, they are using basis to refer to only the non-deductible contributions.  Of note, however, is that basis specifically excludes earnings.  If you have deposited, say, $5000 one year and $5000 the next, then your basis is $10,000, even if the balance has grown to, say, $12,000 (which includes the earnings). As may be evident by now, earnings are not equivalent to deductible contributions.  Earnings may arise from such contributions but they are not the same.  Rather, earnings are the net positive investment results from all contributions.  Again, if you had contributed $5000 one year and $5000 the next and the balance has grown to $12,000, then the earnings portion is $2000. So to interpret what happened in the specific example provided: Over the years, the account holder contributed (deposited) a total of $15,000 into his account.  These must have been non-deductible contributions in the case of the IRA in order to arrive at basis of $15,000. Over time (and coincident with the deposits), that $15,000 grew to $24,000 .. i.e. earned $9,000 in earnings. Then, the nearly 50% drop caused the balance to decay to $13,000.  This means all $9,000 of his earnings were wiped out, plus $2000 of the original basis. The remaining $13,000 is all basis .. that is, considered to be original money deposited to the account, no earnings. In effect, the account has lost $2000 of basis, because $15,000 was deposited and only $13,000 remains.  Simplistic way of looking at it:  A $15,000 investment resulted in a final $13,000 sale, i.e. a net loss of $2000. It doesn't matter that it hit $24,000 in the meanwhile .. it could have hit $250,000 in value and then dropped to $13,000 and the net result would be the same: a loss of $2000 in basis. Traditional IRA earnings are always tax-deferred .. i.e. whether earnings arise from deductible or else non-deductible contributions, when one takes a distribution (withdraws) from an IRA and the distribution includes earnings, the earnings portion is always taxable income.  Doesn't matter if the earnings arose from one kind of contribution or the other. I don't think in this example there were any deductible contributions whatsoever. Does that make sense / help?" "Short answer, yes. But this is not done through the deductions on Schedule A. This can happen if the employer creates a Flexible Spending Account (FSA) for its employees. This can be created for certain approved uses like medical and transportation expenses (a separate account for each category). You can contribute amounts within certain limits to these accounts (e.g. $255 a month for transportation), with pre-tax income, deduct the contributions, and then withdraw these funds to cover your transportation or medical expenses. They work like a (deductible) IRA, except that these are ""spending"" and not ""retirement"" accounts. Basically, the employer fulfills the role of ""IRA"" (FSA, actually) trustee, and does the supporting paperwork." I'm not sure about reimbursement, you'll have to talk to a tax adviser (CPA/EA licensed in your State). From what I know, if you pay your own insurance premiums - they're not deductible, and I don't think reimbursements change that. But again - not sure, verify. However, since you're a salaried employee, even if your own, you can have your employer cover you by a group plan. Even if the group consists of only you. Then, you'll pay your portion as part of the pre-tax salary deduction, and it will be deductible. The employer's portion is a legitimate business expense. Thus, since both the employee and the employer portions are pre-tax - the whole cost of the insurance will be pre-tax. The catch is this: this option has to be available to all of your employees. So if you're hiring an employee a year from now to help you - that employee will be eligible to exactly the same options you have. You cannot only cover owner-employees. If you don't plan on hiring employees any time soon, this point is moot for you, but it is something to keep in mind down the road as you're building and growing your business. You can only deduct (with the 2% AGI threshold) expenses that: You've actually incurred. I.e.: you actually paid for equipment or services provided and can show receipts for the payment. At the request of the employer. I.e.: you didn't just decide on your own to buy a new book or take a class, your employer told you to. With business necessity. I.e.: it was in order for you to do your job. And you were not reimbursed by your employer. I.e.: you went somewhere and spent your after tax money on something employer explicitly told you to pay for, and you didn't get reimbursed for that. From your story - these conditions don't hold for you. As I said in the comments - I strongly suggest you talk to a lawyer. Your story just doesn't make any sense, and I suspect your employer is doing something very fishy here. All data for a single adult in tax year 2010. Roth IRA  401K Roth 401k Traditional IRA and your employer offers a 401k Traditional IRA and your employer does NOT offer a 401k So, here are your options. If you have a 401k at work, you could max that out.  If you make close to $120K, you could reduce your AGI enough to contribute to a Roth IRA. If you do not have a 401k at work, you could contribute to a Traditional IRA and deduct the $5K from your AGI similar to how a 401k works. Other than that, I think you are looking at investing outside of a retirement plan which means more flexibility, but no tax advantage.