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Old 08-28-2017, 01:29 AM
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Self-employed IRA options

My business is set up as S-Corp with myself as the only W2 employee, and my wife as a 1099 contractor.
I am 47, my wife is 51. I have a traditional 401K from a former employer (from a while back).

Researching my options, I found Solo 401K and SEP IRA appealing for different reasons.

With Solo 401K I can borrow, and it allows non-traditional investment. Both of these features are important to me.
But with SEP IRA I can deduct my contributions as a business expense, which I understand I cannot do with Solo 401K.
Please correct me if I am mistaken about any of this.

With this in mind I am considering the following strategy:
1. Roll over the old traditional 401K to a new Solo 401K
2. Make new contributions to a SEP IRA, taking business expense deductions
3. Later roll over SEP to the Solo 401K, making the funds available for borrowing and non-traditional investing.

Does this make sense? Am I missing anything? Are there other alternatives that may meet the above objectives?

Thanks
-Art



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Old 08-29-2017, 07:58 PM
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My business is set up as S-Corp with myself as the only W2 employee, and my wife as a 1099 contractor.
I am 47, my wife is 51. I have a traditional 401K from a former employer (from a while back).

Researching my options, I found Solo 401K and SEP IRA appealing for different reasons.

With Solo 401K I can borrow, and it allows non-traditional investment. Both of these features are important to me.
But with SEP IRA I can deduct my contributions as a business expense, which I understand I cannot do with Solo 401K.=======>>since your business is taxed as an S-corp, contributions that you make as an employee would reduce the amount of wages that would appear in box 1 on your W-2 ? and therefore the amount of wages that show up on your Form 1040. Note that they do not reduce the amounts that show up in boxes 3 and 5 (?Social Security Wages? and ?Medicare Wages?). In other words, these contributions reduce your income tax, but they do not reduce your payroll taxes.but Employer contributions to the solo 401(k) would show up on line 17 of Form 1120S as ?Pension, profit-sharing, etc., plans.? This would reduce the amount of income from the S-corp that would be passed through to you as the owner, thereby reducing your income tax. But, because this income is not subject to payroll taxes in the first place, these contributions will not reduce your payroll taxes.
In other words, for an S-corp owner-employee, employer and employee pre-tax solo 401(k) contributions are equally advantageous (just as they are for a sole proprietor). Though again, by prioritizing employer contributions, you preserve your more flexible employee contribution space, in case you decide you want to make Roth contributions later in the year.


With this in mind I am considering the following strategy:
1. Roll over the old traditional 401K to a new Solo 401K
2. Make new contributions to a SEP IRA, taking business expense deductions=====>As the sole shareholder of an S corp, you are free to create a SEP IRA, which is a simplified employee pension individual retirement account. Your company can contribute up to 25 percent of your salary or $50k whichever is less, and it books the contribution as an expense. Note that if you have other employees, the company also must make contributions to their accounts. As with the SEP, the company?s contribution is tax deductible.
3. Later roll over SEP to the Solo 401K, making the funds available for borrowing and non-traditional investing.=========>> rolling your SEP-IRA holdings (all of which are tax-deferred) into a Solo 401(k). your primary motivation for doing this is to get your pre-tax retirement holding into a so-called ?qualified? plan IRS rules do not permit loans with a SEP IRA. But A SEP IRA is the right choice if you aren't in need of a loan and don't anticipate needing one in the future. Instead, Solo 401(k) plans are versatile retirement plans, especially useful for small-business owners and independent contractors thanks to their low fees and ease of customization. Another attractive feature of Solo 401(k) plans is a loan option, which allows the plan owner to borrow money at a low interest rate.
Such a loan can be a nice advantage, especially when an influx of cash is needed due to financial difficulty. However, plan owners should be cautious.
The Solo 401(k) loan option, which is not available with an IRA, allows you to borrow from your own retirement funds, up to 50% of the plan value or $50,000, whichever is less. The interest rate is low, at prime rate plus 1%. This can be a great help in case of financial problems. Some people also use these loans to pay off personal debt, moving that debt to a lower interest rate.
Before borrowing from your Solo 401(k), though, consider the loss of investment opportunities it represents. If the plan is earning high investment returns, perhaps it is not wise to take money out of it unless completely necessary.
If you?re thinking about borrowing to pay back other debt, such as student loan or credit card debt, compare the interest rate you?re currently paying with the returns your investments in the plan are earning.
Also consider your ability to repay the loan. While the interest rate is low, there is a five-year payback period, which is shorter than with many regular debts. As a result, each payment will be higher because of the shorter period.
If you can?t pay off the loan within the five-year period, the unpaid portion will be treated as a withdrawal. For those who are younger than 59? years old, there will be an expensive fine for early withdrawals, on top of the income tax you?ll have to pay.
A Solo 401(k) loan can be useful during financial difficulty, and it can provide a way to move debt to a lower interest rate. However, it should be seen as the last option, because taking money out of retirement savings and away from investments is generally not recommended. As with many other financial tools, Solo 401(k) plan owners need to understand their options before making their decision.


Does this make sense? Am I missing anything? Are there other alternatives that may meet the above objectives?=>as mentioned above



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Old 08-31-2017, 12:15 AM
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Thank you. All great info.

I do have a question about this point:
Quote:
Originally Posted by Wnhough View Post
In other words, for an S-corp owner-employee, employer and employee pre-tax solo 401(k) contributions are equally advantageous
Let's see if I understand this correctly.

Suppose I take all the income from my corp as W2 wages.
In this case SEP will offer more tax benefits than Solo 401K as I will be able to shelter at least some of the income that otherwise will be subject to payroll tax.
Correct?

Now, suppose I take part of my income as profits and it happens to be exactly the amount I invest in a retirement plan.
Am I understanding you correctly that in this case tax advantages of SEP and 401K are equal?

If that is true, it seems to me the only advantage of SEP is potentially lower fees.

In addition, if that is true, I would rather pay myself a higher W2 wage to get it closer to IRS national average stats for my occupation.

Thanks again.


Last edited by artmt : 08-31-2017 at 12:25 AM.


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Old 08-31-2017, 03:42 AM
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Quote:
Originally Posted by artmt View Post
Thank you. All great info.

I do have a question about this point:

Let's see if I understand this correctly.

Suppose I take all the income from my corp as W2 wages.
In this case SEP will offer more tax benefits than Solo 401K as I will be able to shelter at least some of the income that otherwise will be subject to payroll tax.
Correct?

Now, suppose I take part of my income as profits and it happens to be exactly the amount I invest in a retirement plan.
Am I understanding you correctly that in this case tax advantages of SEP and 401K are equal?

If that is true, it seems to me the only advantage of SEP is potentially lower fees.

In addition, if that is true, I would rather pay myself a higher W2 wage to get it closer to IRS national average stats for my occupation.

Thanks again.
Suppose I take all the income from my corp as W2 wages.
In this case SEP will offer more tax benefits than Solo 401K as I will be able to shelter at least some of the income that otherwise will be subject to payroll tax.
Correct?=======>>>unless you have employees.I guessSelecting the right retirement plan can be confusing and the subtle differences between options can sometimes be overlooked. you need to check it with a retirement admin first for more professional advice; as said, The SEP IRA and Individual 401k are the two most common retirement plans chosen by owner and spouse businesses due to their high contribution limits and flexible annual contributions. solo401k plans have greater administrative responsibilities than a SEP ira but may allow a larger annual contribution at identical income levels due to the way the annual contribution is calculated.SEP IRAs work in almost the exact same way as a traditional IRA. That is, you are allowed an above the line deduction for any contributions you make, and distributions from the account are taxable as income. The only really important difference is the contribution limit. a SEP IRA is a type of IRA that works well for the self-employed or the small biz owner. So if you have employees, they can make contributions. But this can be an expensive proposition, since contributions for employees must match the percentage of the salary that the owner makes for themselves. So if you?ve got employees, then, a solo401k or a Simple IRA might be a better choice. If you?re interested in setting up a 401k plan for your employees, check out services such as America?s Best 401k, which can help you provide your employees with a quality, low-cost plan. In most circumstances you can contribute more sometimes much more ? to an solo 401(k) than you could contribute to a SEP IRA or SIMPLE IRA.

Now, suppose I take part of my income as profits and it happens to be exactly the amount I invest in a retirement plan.
Am I understanding you correctly that in this case tax advantages of SEP and 401K are equal?

If that is true, it seems to me the only advantage of SEP is potentially lower fees. =====>>as mentioned previously; Simply, the SEP IRA is a great choice for self employed individuals or owner and spouse businesses who would like to contribute up to 25% of their W-2 earnings up to the SEP IRA contribution limit. A SEP provides high maximum contribution limits, but an solo401k may allow a greater contribution at the same income level. also you can set up a SEP IRA and convert to an solo 401k in the future if you change your mind and either want to receive an solo 401k loan or if you want to contribute more than the calculations of a SEP IRA will allow. Converting from a SEP IRA to an solo 401k and transferring retirement assets from a SEP IRA to a new solo 401k can be accomplished by completing some minor administrative paper work

In addition, if that is true, I would rather pay myself a higher W2 wage to get it closer to IRS national average stats for my occupation.====>>solo 401k Plan is an IRS approved retirement plan, which is suited for business owners who do not have any employees, other than themselves and perhaps their spouse. The solo401(k) Plan is not a new type of plan. It is a traditional 401(k) Plan covering only one employee. You?ll find out that, while both plans have a cap of $54k(for 2017), as said, the solo 401(k) allows you to contribute more of your salary below that cap.Both plans allow you to contribute 25% of your earnings But the solo 401(k) allows an additional $18k in salary deferrals from 2015 to 2017. So, depending on your salary and how much you want to contribute, the solo 401(k) might be a better option, because you can save more money in it



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