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Retirement Account Contribution Limits

Kimberly Lankford

The amount you save in a 401(k) doesn't affect how much you can put into a Roth IRA or SEP IRA.



I have a question about the maximum amount one can contribute in a single year to 401(k)s, Roth IRAs and SEP IRAs. I recently left my previous employer, where I already contributed $4,000 in a 401(k) this year (2007). I started contracting as self-employed, and I estimate my income from contracting alone will be $130,000 this year. In addition to the $4,000 in my 401(k) plan, what is the total amount I can contribute this year to my SEP IRA account? Can my wife and I still contribute to our Roth IRA accounts after I max out my SEP IRA account?

Easy answer on the Roths. You and your wife can contribute up to $4,000 to each of your Roth IRAs in 2007 ($5,000 if age 50 or older), regardless of your other retirement-savings contributions, as long as you meet the income limits. To make the full Roth contributions, your adjusted gross income on a joint return must be below $156,000 in 2007 ($99,000 if single).

And your 401(k) contributions won't affect your SEP limits because SEPs are considered to be employer contributions, says Bob D. Scharin, RIA senior tax analyst from Thomson Tax & Accounting. You can contribute up to 20% of your business income (which is business income minus half of your self-employment tax) to a SEP, up to a maximum of $45,000 in 2007, even if you've invested in a 401(k).

If you'd opened a solo 401(k) for self-employed savings instead of a SEP, however, your other 401(k) contributions would affect your limits. You can invest up to $15,500 in employee contributions to 401(k) plans in 2007 -- which would include both the $4,000 from your first job and any solo 401(k) contributions from your consulting work. But you can also invest 20% of your business income in a solo 401(k) as an employer (calculated in the same way as for SEPs), with a maximum contribution of $45,000 in 2007, plus an extra $5,000 in catch-up contributions if you're 50 or older.

When you add up both the employer and the employee portion of the solo 401(k) contributions, that type of plan can give you higher limits than you'd have with a SEP, even though your maximum will be reduced by your other 401(k) contributions.

Got a question? Ask Kim at askkim@kiplinger.com.



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