SEP IRA Contribution?

Question

Tax deferral help needed:  I am a full-time W-2 employee and max out my pre-tax contributions to my 401(k).  I have a side-hustle real estate LLC that includes passive income from fifteen rental units as well as active income from real estate brokerage related activities.  When I started, I committed myself to plowing back 100% of my side hustle net earnings into new investments for ten years to allow compounding.  During that time, I planned to cover the tax hit from my 'personal' W-2 funds.  The side-hustle has grown such that my W-2 post-tax savings are insufficient to cover my side-hustle tax liabilities each year at tax time.

Question: Is it possible/permissible to open a SEP IRA and make contributions from my real estate LLC while simultaneously maxing out my traditional employer-based 401(k)? If so, will / how could a SEP IRA reduce the immediate tax impact of side hustle earnings, deferring it until retirement distributions?  If so, could I do a self-directed SEP IRA from these funds and continue the rental portfolio growth?

Basit Siddiqi · Answer

@Greg SwartzbergYou may want to reach out to your accountant.There are limitations on how much you can put away into a SEP based on the income from your business. Rental income won't count towards this calculation. looks like only the brokerage income will.

Justin Windham · Answer

@Greg Swartzberg

Welcome to Bigger Pockets! I'm glad you've been able to get such helpful responses so far.

Ashish Acharya · Answer

Yes, your LLC can fund SEP and you can also max out your employer 401k. You can also contribute to IRA/Roth Ira  depending on your income level.

What is your SE income ?

SEP is limited to 25% of your net earned income( rental income doesn’t count). If your earned income is less than 50k, you will get to defer more with SIMPLE IRA or solo 401k.

You need to provide your details to your professional so he\she can analyze the best one for you.

If you were thinking of shielding 2018 income, yes the only option you have is SEP. You have until tax extension to establish it and fund it.

Carl Fischer · Answer

@Greg Swartzberg

1st congrats on succeeding in your plan. How much are you trying to put away?

You are a great example to people who always say they will do their IRAs later. This problem may have been avoided had you used a tax deferred or tax free account to implement some or all of your “side hustle” in real estate. There are different accounts based on your circumstances that could be used to lower taxable income. Some will disappear after 4/15 but this will be a good exercise for planning 2019.  Talk to your cpa he knows your situation best. If he doesn’t have any ideas-pm me and we can discuss a few ideas that may relieve some of the sting. Good luck.

George Blower · Answer

@Greg Swartzberg

1. Yes but you can only make pre-tax SEP IRA contributions based on your active self-employment income.

2. You could set up a self-directed SEP IRA which allows for investing in real estate whether directly or through an LLC.

3. If you don't have any full-time w-2 employees, you could set up a Solo 401k which would allow you to make voluntary after-tax contributions (without regard for the fact that you max out your contributions to your 401k through your w-2 employer).  You could also invest your Solo 401k funds in real estate if your Solo 401k plan allows for such investing.

SEP IRA Contribution?

Most Popular Reply