Does One Retirement Plan Affect How Much I Can Put in Another?

Beverly,

No one has been able to answer this question consistently:

I have a full time job in a hospital and maxed out the 403(b) at $11,000.

However, I also have a large income from consulting, for which I get 1099s. I have opened a SEP IRA, and I am eligible to contribute the maximum ($40,000).

Can I put in all $40,000, or, because of my 403(b), can I only put in $29,000? In other words, does the fact that I have already put $11,000 into a 403(b) somehow reduce my max amount that I can put into a SEP IRA, even though they are different accounts?

Thanks,

Chris

Chris,

In the eyes of the Internal Revenue Service, you are both an employee and sole proprietor of your own business -- and never the twain shall meet. Well, except for on your 1040.

The amount you're able to contribute to your 403(b) plan (a plan similar to the 401(k) used by nonprofits and academic institutions) is based entirely on your full-time salary as an employee. Currently, the maximum contribution allowed is $12,000; it was $11,000 for 2002. Participants age 50 or older can contribute an additional $2,000 in 2003; $1,000 was the figure for 2002.

Likewise, the amount you're able to contribute to a SEP IRA (a "simplified employee pension plan" that operates much like an IRA) is dependent on the income you earn from your consulting business. Technically, the "employer" can contribute up to $40,000 or 15% of the "employee's" income, whichever is less. (Because employer and employee are one and the same in this case, you're free to contribute the max on your own behalf.)

In any case, how much you contribute to a 403(b) plan in no way affects how much you can contribute to your SEP IRA, and vice versa. The rules get a bit trickier in rare circumstances such as when someone is covered by both a 401(b) and a 401(k), for instance, but that's not for you to worry about.

Hey Bev,

Quick question on work-related driving expenses, which really stems from a much larger question.

I get monthly lump sums for office supplies for my home office, Internet connection, use of my car, etc. If, for example, my office supplies expenses are greater than my lumps sum for office supply, then the difference is tax deductible, correct? If this is true, I would gather the same is true for the lump sums I get for an Internet connection, car, etc.

Regarding the use of my car, I get $700 (pretax) a month for the use of my car for work. I had the choice of a company car, but I chose the $700/month instead. Does this $700 cover any and all car expenses I incur? Can I not, in addition, deduct $.365 per mile that I drive for work? If I calculate my total car expenses, including the $.365 per mile, and it comes to more than $700 a month, then I can deduct the difference, correct?

Hope these questions are clear. Thanks for whatever advice you can offer. You da woman. Keep it up the good work.

Duncan W.

Hey Duncan,

You're in for a bigger boondoggle than you expected -- you can probably deduct all of the expenses relating to your home office, as well as your car. Here's what you need to know:

First of all, because you get a monthly stipend for the use of your car and the purchase of supplies, Internet access, and other costs relating to your home office, that stipend is taxable income. It should show up on your W-2. That may sound like bad news (although you should be already aware of that fact), but the good news is that means all your expenses are deductible.