SEP IRA

Posts Tagged ‘retirement’

Question: As a small business owner, can I have a Solo 401k and SEP IRA at the same time?

I am currently employed full-time at a company but I have my own cleaning business on the side. I want to save money in 2007 while lowering my tax bill so I wanted to know if I can have a Solo 401k and a SEP IRA at the same time?

Answer: No. SEP-IRAs are not allowed if you have a 401k program, or even if you have access to a 401k program and dont avail yourself of it.

Part 1 of Solo 401k vs. Self Directed IRA – Intro & Eligibility

Question: Individual 401k – Solo 401k – SEP IRA?

I’ve recently become self employed and have a 401k at my old job. I just started doing research on self employed retirement plans like the SEP IRA and individual 401k. I found some good information about them here http://www.individual401k.com

From reading information about them the Individual 401k and SEP have the same limits $44,000 but with the individual 401k you might be able to contribute more at “identical income levels”. Here is a quote from their website.

“Compared to other retirement plans you may be able to make greater contributions at identical income levels, therefore maximizing retirement contributions and valuable tax deductions.”

Has anyone else set one of these retirement plans up? Should I setup a SEP IRA instead of an Individual 401k? What are the main things I should be considering when I make my decision?

Thank you for any information you can provide about the SEP IRA or Individual 401k to someone who is self employed.
JT

Answer: JT this is probably what you need to help you. It explains the differences pretty clearly.

http://www.taxalmanac.org/index.php/SEP_IRA_versus_Solo_401k_/_Individual_401k

SEP IRA versus Solo 401k / Individual 401k

Introduction:

Are you still recommending a SEP IRA as a retirement plan to your self employed clients? I’m guilty of that too until I learned about how some of my clients could benefit from the Individual 401k (sometimes called a Solo 401k) as an alternative to a SEP IRA. A SEP IRA is a good choice for some self employed clients, but in other situations an Individual 401k provides a larger Contribution / tax deduction versus a SEP IRA

About the Topic:

Individual 401k / Solo 401k plans are available to sole props, LLC and S and C corps. The advantage is in how the contributions are calculated. Also, a client that has an Individual 401k can have a loan, something they can not have in a Sep Ira. For example, I have had a client that left an employer and had a 401k, rolled over their 401k into an Individual 401k and then borrowed $50,000 to finance the startup of his business. There are no income or credit qualifications of getting the loan and interest is paid back into their own 401k.

Contributions Sep Ira versus Individual 401k / Solo 401k

In the example below the client is age 55 will have $100,000 net income in 2006 as a sole prop.

Sep Ira – max Contribution would be $18,587

Individual 401k – max Contribution would be $20,000 + $18,587 = $38,587.

Before I knew of the benefits of the Individual 401k I would have recommended a Sep Ira and would have left a $20,000 tax deduction on the table.

Not every client can make a Contribution greater than the $18,587 permitted in a Sep Ira in this example, but for those clients that can an Individual 401k is clearly more advantageous. Also, a very interesting point is the benefits can be doubled for a husband and wife both working for the business and each with 100k net income would be able to contribute a total of $77,174 to an Individual 401k.

Summary:

An Individual 401k may provide your clients with a greater tax deduction and retirement Contribution when compared to a Sep Ira. Also, an Individual 401k allows a loan that can provide a financial cushion or can help finance the startup of the business. I have had clients setup retirement account at this firm and have become knowledgeable about these retirement plans by reading the information on http://www.individual401k.com

Rolling Sep Ira into 401K – Realty Academy – Chris Bird.mov

Question: What should I invest in besides an IRA?

I already have a Roth IRA with mutual funds between American Balanced Fund and Vanguard Star (balanced) Fund with about 15K between the two. Next year I am no longer going to contribute to the American Fund because of the loads and instead put that $$ into Vanguard’s 2035 Target Retirement Fund, which is more stock oriented rather than balanced. I am 36 years old.

What is another thing I should be investing in for the long term (not an IRA unless a SEP-IRA) that would be “tax friendly”? Maybe a tax-managed fund? I don’t have the option of a 401k. Part of my income comes from self employment, that’s why I was considering a SEP-IRA. Any specifics regarding a good tax-managed fund though? Thanks

Answer: You should first choose a tax sheltered option such as a SEP-IRA and maximize your Contribution to that account. Because your investment grows tax deferred, you need not worry about tax efficiency and simply focus on lower costs. Vanguard 2035 Target Retirement Fund sounds good because of its low cost structure and it automatically rebalances as you approach your retirement age.

Beyond that, if you want to save in a non-tax sheltered account (i.e. taxable account), then there are tax managed separate accounts, but those are expensive and would make sense only for high-networth individuals. So, I would recommend low cost index mutual funds or ETFs. ETFs are more tax efficient than mutual funds. You could also include some municipal bond funds in your portfolio as the interest income is tax free. If you invest in munis from your state, you also get shelter from state taxes.