Steve Alverson, CFP®
Financial Advisor
Utilizing Roth Options Through SEP and Traditional IRA Contributions
(Please ask your accountant about this strategy before utilizing it)
We are big supporters of getting as many assets inside of a Roth as possible, especially for folks that are 10+ years away from using the funds. The tax-free growth of Roth contributions will more than pay for the short-term taxes paid in the present.
To backtrack, a Roth-based retirement account is tax-advantaged and allows for qualified withdrawals on a tax-free basis. The big difference between a Roth and a Traditional retirement account is that the Roth contributions are made with after-tax dollars, meaning the money you put into the account is not tax-deductible. While you will have to manage the tax bill on the front end, all growth and distributions from the account in the future will be tax-free.
A musician or entertainer’s income is volatile and sporadic throughout the year. Most are considered self-employed and contribute to their long-term savings through a SEP (Simplified Employee Pension) IRA, as they don’t have access to traditional 401(k)s and 403(b)s.
The SEP IRA is tax-deductible. If a self-employed entertainer can contribute the maximum to their SEP IRA, they are most likely not allowed to contribute to a Roth IRA because of income limitations.
However, the IRS allows for an unlimited amount of Roth conversions throughout the year. Even better, you could convert your contributions every year regardless of income. Roth IRA contributions are with after-tax dollars anyway, so if you max out a SEP and then convert, it’s almost like doing a 57k+ Roth contribution!
“A musician or entertainer’s income is volatile and sporadic throughout the year. Most are considered self-employed and contribute to their long-term savings through a SEP (Simplified Employee Pension) IRA, as they don’t have access to traditional 401(k)s and 403(b)s.”
If you are tax-averse, one strategy might be to take advantage of lower-income years to convert the previous year’s contributions. You will have to pay taxes on the conversion, but it could be less than the tax deduction received from the original contribution.
I will almost always say to contribute to Roth accounts, regardless of income. Even if you are in the highest tax brackets. (Yes we even have clients in the movie business that live in high tax states like California utilizing this strategy). With that being said, there are exceptions to every rule.
In the end, the best retirement savings option depends on your situation. If you are curious about which strategy is best for you, we would love to help.
Hopefully, congress won't mess it up.
Steve Alverson, CFP® is a Certified Financial Planner, Financial Advisor, and Partner at McCall & Associates. Steve, along with his colleagues Barry McCall, CFP®, and Austin Coley, are financial planners in Brentwood, Nashville, and Franklin, TN. McCall & Associates is a team of financial planners and financial advisors offering retirement planning, investment management, financial planning, and wealth management. McCall & Associates is based out of Brentwood, Franklin, and Nashville, TN, and additionally serves the customers of First National Bank in Southern Tennessee and Northern Alabama.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Steve Alverson, CFP ® and not necessarily those of Raymond James.