Hi there,
I'm in my mid-twenties and am self employed. I have formed an LLC/Corporation for my business. I have a relatively high savings rate. It takes a very tiny portion of my yearly savings to Max out my Roth IRA with $5,500 every year. After that, I am just left with a substantial taxable 3-fund portfolio that gets a lot of healthy contributions. My question is this--what should be the proper order of placement for my investment/retirement saving?
Currently its
1) Max Roth IRA with
2) Dump $ into taxable account/3 fund portfolio.
What should be going between #1 and #2? Sep IRA? Solo 401k? Something else I'm not thinking of? I'm not overly worried about the lack of liquidity in those retirement vehicles, mainly due to the fact that my investment saving is primarily for retirement (at least 30, maybe 35 years away).
To provide some quick information about my business, I don't have any "full time" employees. There area a large number of people that work for us sporadically as independent contractors, and are 10-99'ed for tax purposes...but I don't currently have any full time staff members. I bring that up because I'm told that issue can play some type of role in what type of 401k/retirement vehicles, etc as a self employed individual. While other people doing well financially benefit greatly from maxing our their employer sponsored retirement plans, thats a benefit I don't have being self employed...soI'm looking for the best way to realize that benefit. Any help would be greatly appreciated. Thank you!
Self Employed--Use of Tax efficient fund space
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Re: Self Employed--Use of Tax efficient fund space
If you do not have any employees, you should consider opening a Solo 401k. Solo 401k is not an option once you have employees. 1099 contractors are fine as they are not employees.
If your corporation pays you a W-2 salary, then Solo 401k would allow for larger contributions than SEP-IRA if your salary is under 140K.
edit (with help from Spirit Rider): If your corporation pays you a W-2 salary, then Solo 401k would allow for larger contributions than SEP-IRA if your salary is under 212K. With you being able to max your Solo 401K contributions at $140K vs. $212K with the SEP IRA.
On 140K salary, it is possible to max out Solo 401k for 53K.
Solo 401k would allow:
Employee salary deferral 18K
Employer profit share (up to 25% of W-2 salary): 25% of 140K = 35K.
Total Contribution - 53K.
SEP-IRA (up to 25% of W2 salary) would only allow 35K.
On 60K salary, Solo 401k would allow 18K employee + 15K employer. SEP-IRA would only allow 15K.
Solo 401k gives more flexibility for larger contributions at lower incomes. Solo 401k is not an IRA which would make it easier to to use backdoor into Roth IRA if your income exceeds the limits for direct Roth IRA contributions.
I suggest maxing out Solo 401k, Roth IRA (using backdoor if necessary), then invest in taxable accounts.
Note that Solo 401k employee salary deferral contributions must be withheld from your paychecks if you're paying yourself W-2 salary. You're running out of paychecks for 2016 with which to contribute 18K Employee salary deferral for 2016 tax year. You must get your solo 401k plan established right away if you want to max out 18K for 2016 tax year. The employee contribution is withheld from the paycheck and then the business makes the contribution to to the 401k on behalf of the plan participant. The employer contribution is also funded from the business account.
The numbers above assume that you're a corporation paying you a W-2 salary. If you're structured differently, say LLC taxed as sole proprietor then a slightly different calculation is used to calculate the max contribution.
If your corporation pays you a W-2 salary, then Solo 401k would allow for larger contributions than SEP-IRA if your salary is under 140K.
edit (with help from Spirit Rider): If your corporation pays you a W-2 salary, then Solo 401k would allow for larger contributions than SEP-IRA if your salary is under 212K. With you being able to max your Solo 401K contributions at $140K vs. $212K with the SEP IRA.
On 140K salary, it is possible to max out Solo 401k for 53K.
Solo 401k would allow:
Employee salary deferral 18K
Employer profit share (up to 25% of W-2 salary): 25% of 140K = 35K.
Total Contribution - 53K.
SEP-IRA (up to 25% of W2 salary) would only allow 35K.
On 60K salary, Solo 401k would allow 18K employee + 15K employer. SEP-IRA would only allow 15K.
Solo 401k gives more flexibility for larger contributions at lower incomes. Solo 401k is not an IRA which would make it easier to to use backdoor into Roth IRA if your income exceeds the limits for direct Roth IRA contributions.
I suggest maxing out Solo 401k, Roth IRA (using backdoor if necessary), then invest in taxable accounts.
Note that Solo 401k employee salary deferral contributions must be withheld from your paychecks if you're paying yourself W-2 salary. You're running out of paychecks for 2016 with which to contribute 18K Employee salary deferral for 2016 tax year. You must get your solo 401k plan established right away if you want to max out 18K for 2016 tax year. The employee contribution is withheld from the paycheck and then the business makes the contribution to to the 401k on behalf of the plan participant. The employer contribution is also funded from the business account.
The numbers above assume that you're a corporation paying you a W-2 salary. If you're structured differently, say LLC taxed as sole proprietor then a slightly different calculation is used to calculate the max contribution.