Asked & Answered: Retirement Overload?

From smSmallBiz

QUESTION: If a self-employed person contributes to a SEP IRA can he also contribute to a Roth IRA? My husband contributed the maximum $5,000 to his Roth IRA. If the corporation contributes to the SEP

J. Kavathas, Chicago, Ill.

ANSWER: It's perfectly fine to make contributions to both a SEP IRA (which stands for Simplified Employee Pension Individual Retirement Account) and a Roth IRA. In fact, it's a great way to sock away as much as you can toward retirement in a tax-efficient manner, says Gene Fairbrother, lead small-business consultant in Dallas for the National Association for the Self-Employed, a trade group.

With the SEP, it's actually the employer (in this case, the corporation) that is contributing 25% of salary or 20% of self-employment income, up to a maximum of $45,000 for 2007. That's significantly more than an individual can contribute to a traditional or Roth IRA. The sizable contribution, plus the fact a SEP IRA is easy to administer, make it a popular retirement-savings vehicle for the self-employed.

In contrast, the Roth IRA is designed for the individual, and the maximum contribution is $4,000 ($5,000 if you are age 50 or older). Yet, "the Roth, particularly for the self-employed person, is a very good retirement vehicle," Fairbrother says. Unlike a traditional IRA, contributions to Roth IRAs are made with after-tax dollars. While you don't get the immediate tax deduction, you do get flexibility: After five years, contributions can be withdrawn from the Roth IRA before age 59 1/2 with no penalty. Business owners worried about inconsistent income can use the Roth IRA to save for retirement, while keeping the ability to access the cash penalty-free if the need arises. See more on retirement plans here .

But there are some income limits with the Roth IRA, and it's possible you may have overcontributed there. For 2007, the contributions are subject to phaseout based on adjusted gross income starting at $156,000 and ending at $166,000 for joint filers. If you've overcontributed, simply withdraw the excess before the due date of your tax return to avoid penalties.

If you've overcontributed to the SEP, the Interal Revenue Service allows you to carry over and deduct the difference in later years. For more information, read IRS Publication 560 .