Help with self-employed plans: SEPIRA + 401K?

[Dash_Riprock]

As a self-employed individual, what is the optimum setup for tax-happy savings plans?

Assume somebody who is able to save the vast majority of his income. I am currently a sole-proprietership but I may switch to a different structure if it has tax advantages for me (liability isn't a big concern for my business).

I have heard I could have both a sepira and a 401k? I have heard I can contribute 25% to the sepira and 25% to the 401k for 50% tax-deffered total? Somebody else said I could contribute up to 100% to the 401k but he's wrong, right? On top of this, I could also have a Roth IRA at $3,000 max?

How exactly do the taxes on these monies work? I deduct the contribution from my income for tax purposes and don't pay any taxes on these accounts until I actually make withdrawals? I've had the roth ira for a while so I understand exactly how that works.

Thanks for any help.

This is a very complicated subject and you should check this answer with the actual wording of the rules and regulation regarding this subject. But in general here is a summary of how it works:

You may setup a SEP-IRA and a 401(k). They both are considered a defined contribution plan under the code for purposes of rules.

For the year 2004 you may contribute only a maximum of "lesser" of 100% of wage/net profit or $41,000 to such plans regardless of how the other limitations (below) calculate which will probably make it less. Plus the Traditional or Roth IRA if you AGI is under the limit.

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The 401(k):
The max deduction as a sole-proprietership (under age 50) for 2004 is the "lesser" of 1) 100% of net profit or 2) $13,000 or net profit * 20%. Plus the matching amount as an employer $13,000 or net profit * 20%. Its 20% rather than 25% as mentioned otherwise because you have to reduce for the employer portion.

An example where net profit after the SE tax deduction is $65,000. The max contribution is:
$65,000-13,000 = 52,000*25% = $13,000
or another way to look at it is
$65,000 * 20% = $13,000

In this example the total deduction is $26,000 (13 employee +13 employer).

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The SEP:
The max deduction as a sole-proprietership for 2004 is the "lesser" of 1)100% of your net profit or 2) 25% of net profit or max of $41,000.

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Both:
The overall limit for the 401(k) and SEP is a total max of $41,000.

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IRA:
If your 1040 Adjusted Gross Income is under the limit (joint return filer $65,000, single filer $45,000) for 2004 you may also make a contribution of $3,000 to a Traditional IRA (tax deduction) or a Roth IRA (no tax deduction).