beginner here, maxed out my SEP-IRA...now what?

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whitecliff
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beginner here, maxed out my SEP-IRA...now what?

Post by whitecliff » Mon Jun 03, 2013 8:53 pm

ok I am a complete newbie to investing but here is my story. My wife and I are both 30. We are completely debt free. paid off over 300k in school debt in about 2.5 years. we own both of our cars. we have no credit card debt. We rent and pay 1250 a month. We live very much below our means.

We both own our own businesses and are independent contractors (not really our employers just want to skate on taxes). Neither one of us has any employees. Our numbers last year were:

-salary approx 2012 300k
-Federal adjusted gross 2012 221k
-Federal taxable income 2012 200k
-I have about 200k in cash sitting in high interest savings waiting for buying a house or purchasing another business
-I have a vanguard account with about 52k in it. About 10k is target retirement fund and rest is mix of stuff that I rolled over from franklin templeton
-HSA contribution 2012 6000k (has about 9k in in it)
-SEP IRA contribution 2012 16k (my wife didnt contribute anything to hers)
-16k was the amount my CPA told me I could contribute based on the "salary" I was paying myself without bumping myself up another tax bracket
-We are on track to have salaries about 330 this year.

My plan to finish this year is to exclusively buy the target retirement fund until I max out my 16k or whatever my CPA says I can invest, but the big question is what do I do with all the extra money I have? Certainly there is something better than 0.89% online savings account. Also can I invest the money from my HSA and just pay cash for medical expenses and where is a good place to do this? All advice and questions are welcome.

Thanks alot

dhodson
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by dhodson » Mon Jun 03, 2013 9:22 pm

Hopefully you are paying yourself a fair salary compared to a w2 worker otherwise I'd be worried.

whitecliff
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by whitecliff » Mon Jun 03, 2013 9:30 pm

Worried in what way, like an audit?

thebogledude
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by thebogledude » Mon Jun 03, 2013 11:00 pm

I'm not sure how you are paying yourself as an independent contractor. Everything should come in as business income (1099).
The SEP-IRA contribution seems low? You are allowed to contribute up to 25%.
You can also look into doing a backdoor Roth and maxing out on I-bonds.

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BolderBoy
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by BolderBoy » Mon Jun 03, 2013 11:05 pm

thebogledude wrote:I'm not sure how you are paying yourself as an independent contractor. Everything should come in as business income (1099).
The SEP-IRA contribution seems low? You are allowed to contribute up to 25%.
Seems low to me as well. You can do both a salary deferral contribution *and* a profit sharing contribution amount and you should be doing both.

Just FYI... If you are really an employee and your employer is treating you like a contractor to avoid some taxes, then you be SURE you are paying all the taxes you owe, lest the employer gets caught and you become embroiled...

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altruistguy
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by altruistguy » Tue Jun 04, 2013 6:34 am

Next Step -- do a Self-Employed (Roth) 401(k) at Vanguard!

This allows each of you to do both of the following:
- Contribute up to the lesser of $17.5k or your earnings, as either pre- or post- tax contributions to the 401(k) as employee contributions.
- Contribute up to the SEP-IRA limits (about 25% of your earnings) as pre-tax contributions to the 401(k) as employer contributions, so long as the combination of employee and employer contributions doesn't exceed $51,000.

For questions about details, contact Vanguard!

dhodson
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by dhodson » Tue Jun 04, 2013 8:31 am

whitecliff wrote:Worried in what way, like an audit?
correct

as an example and this may not apply to you but if you are doing job x which normally pays a person 100k per year but are paying yourself a salary of 20k and taking 80k in distributions/dividends then its very unlikely this will fly and it will attract attention.

if you are paying yourself a salary of 100k bc this is the avg of what such person makes and your company happens to have an extra 20k that is distributed to the owner as profit (which happens to be you) then i imagine you will be okay although it will always be questionable what is really just hidden salary. My accountant told me they use salary.com information although i have no idea if this is what really happens.

whitecliff
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by whitecliff » Tue Jun 04, 2013 9:35 am

dhodson wrote:
whitecliff wrote:Worried in what way, like an audit?
correct

as an example and this may not apply to you but if you are doing job x which normally pays a person 100k per year but are paying yourself a salary of 20k and taking 80k in distributions/dividends then its very unlikely this will fly and it will attract attention.

if you are paying yourself a salary of 100k bc this is the avg of what such person makes and your company happens to have an extra 20k that is distributed to the owner as profit (which happens to be you) then i imagine you will be okay although it will always be questionable what is really just hidden salary. My accountant told me they use salary.com information although i have no idea if this is what really happens.
I pay myself 3017.50 per month and then perform S-corp distributions whenever money starts building up in the business account.
I pay 4500 federal taxes per month and 900 state taxes. These are just monthly estimates.
I know it sounds very low and it may be but I am pretty sure my CPA adjusts this at the end of the year to make it more reasonable and then pay the additional taxes for salary versus distributions at the end of the year. I will look at my return tonight and post an update.
BolderBoy wrote:You can do both a salary deferral contribution *and* a profit sharing contribution amount and you should be doing both.
Can someone explain to me more about this? thanks alot for all the advice so far. I am learning alot and hopefully can get my retirement going in the right direction.

whitecliff
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by whitecliff » Tue Jun 04, 2013 10:00 am

altruistguy wrote:do a Self-Employed (Roth) 401(k) at Vanguard!
I was about to set one of these up but since I am looking at buying a practice then it would not be applicable for that situation so I didnt want to set it up and then have to dissolve it after a few moths. I did not know it could be administered through vanguard. I will have to look into it.

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PaddyMac
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by PaddyMac » Tue Jun 04, 2013 10:01 am

In the SEP-IRA you can ONLY do employER contributions. Not sure why your wife isn't maxing out her SEP, but she has all year I suppose.

You need to open a Vanguard 401k account (the Individual 401k will work for both you and your spouse). Then you can do the exact same employER contribution (25%) in either this account OR your SEP, but you also get another bit tax-deferred space - the $17,500 employEE contribution. You can't do that in a SEP.

We're pretty much in the same boat ($300K income husband and wife, although we are not incorporated). We manage to save @ $30K+ in our SEP, plus $17,500 in our 401k. Because the 401k is a flat amount and is not based on your income, you can save that on a regular basis each month. You may be able to open a Roth IRA if you max out at your AGI with tax deferred savings.

btw, you can keep both the SEP and the 401k going at the same time, but the employER space is the same - you don't get to double it. So I just keep my SEP as it was before the 401k, as I have more choices in that account.

whitecliff
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by whitecliff » Tue Jun 04, 2013 1:17 pm

PaddyMac wrote:you can keep both the SEP and the 401k going at the same time, but the employER space is the same - you don't get to double it
So can you contribute to both of these accounts at the same time? I was under the impression you cannot do this. Or is it that you just cannot count the same money as employER contribution?

This may be a stupid question but when I am doing employER contributions to my SEP I fund this through my business account. If I do start a solo 401k and start funding it also with employEE contributions does this need to be through a post tax personal account or can it be from the same business account? or does it even matter?
PaddyMac wrote:You may be able to open a Roth IRA if you max out at your AGI with tax deferred savings.
I thought the availability to do a Roth were income based and that were are out of the category. Please explain how I could do this.

Thanks again everyone who has contributed.

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BolderBoy
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by BolderBoy » Tue Jun 04, 2013 2:02 pm

PaddyMac wrote:In the SEP-IRA you can ONLY do employER contributions.
No, he can do both profit sharing and salary deferral just as with a solo 401k. I had a SEP-IRA for many years and did both to the max allowed with the complete blessing of the IRS (and TurboTax).

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PaddyMac
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Re: beginner here, maxed out my SEP-IRA...now what?

Post by PaddyMac » Thu Jun 06, 2013 9:01 am

The SEP-IRA may be different for a corporation. For a sole proprietor like me, it is all employer contributions. At least, that's what I've been told.

Yes, you can contribute to both a SEP and a 401k in the same year, but you need to add the amounts together as the saving "space" is the same 25% (or 20% for sole proprietors).

I did extensive research when I opened the 401k. You must have opened the SEP first, as you can't open a SEP if you already have another qualified plan.

For a sole proprietor, it doesn't matter which bank account pays the contributions. Not sure about corps.

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