SEP IRA Tax Question

swiftrhett · #1 12-01-2005, 02:28 AM

I own part of a partnership. So, I can put 25% of my profit into an SEP IRA. The penalty for early withdraw for an IRA is 10%. So shouldn't I always contribute the maximum to the IRA to avoid it being taxed at 15-50% or whatever my bracket is? Even if I withdraw from the IRA early, it's only taxed 10%. Is there something I'm missing?

Ok, I think I found it. When you take money out of an IRA, it is also taxed as income. So this might be a smart thing to do if you intend to be in a lower tax bracket later, but not a higher one. I dunno, the 10% penalty is not too bad considering all of the nontaxable intrest you can make. I wonder what the breakeven point is.

lastsamurai · #2 12-01-2005, 05:04 AM

Yes you should always max out your IRA's, 401K's and ect...

as for the 10% Penalty...that is added to your capital gains tax and the state penalty (california is 2.5%) so over all your total liability could be 35% depending on your tax bracket. and the NON TAXABLE interest/capital gains will be taxed....

swiftrhett · #3 12-01-2005, 12:32 PM

Why should I max out my IRA if I'm 24, and I'd rather not keep my money locked up for 25 years?

Sniper · #4 12-01-2005, 12:42 PM

[ QUOTE ]
Why should I max out my IRA if I'm 24, and I'd rather not keep my money locked up for 25 years?

[/ QUOTE ]

You should be planning for your future retirement, now! The difference between starting early and starting late are tremendous in terms of $$ at the end.

That said, you should put into your IRA (and other retiremenet accounts) as much as you are comfortable, with the goal being to be comfortable putting in the max!

lastsamurai · #5 12-01-2005, 03:24 PM

Because
1. It lowers your AIG and puts you in a different tax bracket.
2. you could always use 10K from your ira if you are a first time home buyer as a down payment. The loop hole to is rule is you are considered a first time home buyer if you havent own a house in 2 years.

BradleyT · #6 12-03-2005, 06:42 PM

[ QUOTE ]
Why should I max out my IRA if I'm 24, and I'd rather not keep my money locked up for 25 years?

[/ QUOTE ]

Assume 10% interest.

A 15 year old can deposit $5,000 for 3 years and never contribute again and be a millionaire at age 65. A 30 year old needs to contribute $5,000 every year until they're 65 to reach the same amount.