Small business owner looking to maximize retirement savings. What's best for me?

[_jason]

Background: This is the first year that I'm full time in my business.  I don't have any employees as I use all contractors.  I also got married this year.  Most of my income is actually royalty income.  My income exceeds the ROTH-IRA limits. 

Last year I opened a SEP-IRA, but I'm not sure if this is right for me long term.  What I liked about it was that you could contribute up to $53,000 a year or 25% of your income.  By the way, is that 25% of the salary I pay myself or 25% of all my earnings, which is salary + business profits + royalty income?

Should I use a SEP? Setup a 401k?  Something else?  (Or if anyone has a recommendation for a planner that charges a flat fee or hourly rate, I'd be interested in that too...)

Thanks!

Jason

[skuzuker28]

Since you are paying yourself a salary, I'm assuming your are organized (or at least taxed as) a S-Corp.

SEP contributions (and the employer contributions for SIMPLE IRAs and 401ks) are based off of earned income, which in your case are the wages you pay yourself.  Unless you are paying yourself a particularly high salary, a 401k will allow you to contribute more for retirement as you can defer $18,000 from your wages, plus have the employer contribution of up to 20% of wages or the cap of $53,000, whichever is less.

[Rufus.T.Firefly]

I have a Self Employed 401(k). I'm a independent contractor receiving a 1099. It was pretty easy to set up and fund - only slightly more complicated than a SEP IRA. It has more flexibility and generally allows for greater contributions in my experience.

If you do go with a SE 401(k) I recommend you speak with your CPA first just to be sure you calculate your contributions. The exact calculation is actually more complicated than what it initially seems (https://www.irs.gov/publications/p560/ch05.html)

But to give you a rough idea, here is Fidelity's calculator: https://scs.fidelity.com/products/mobile/sepMobile.shtml

This year, based on my income, expenses and taxes, having a 401(k) instead of a SEP allowed me to contribute almost twice as much thanks to the individual $18,000 contribution maximum plus the employer contribution.

Also, my CPA advised me to set up and fund the account prior to the end of the calendar year. This was counter to Fidelity's advice which said I could wait until April 15th of the following year. So you may want to hustle...but my CPA could have been mistaken.

[wanderin1]

Best to consider your needs for both today and tomorrow. For example, currently you have only contractors, not employees. Any chance you’ll add employees in the future? If so, make sure you know what employee retirement contributions your chosen tax deferral plan might make your responsible for.

This article is a few years old, but still accurate: http://money.usnews.com/money/blogs/on-retirement/2013/06/10/4-retirement-plan-options-for-small-businesses

I've owned a few businesses, and always talked with my accountant to make the best decision in this area. I'd suggest the same for you.

[johnny847]

Background: This is the first year that I'm full time in my business.  I don't have any employees as I use all contractors.  I also got married this year.  Most of my income is actually royalty income.  My income exceeds the ROTH-IRA limits. 

Last year I opened a SEP-IRA, but I'm not sure if this is right for me long term.  What I liked about it was that you could contribute up to $53,000 a year or 25% of your income.  By the way, is that 25% of the salary I pay myself or 25% of all my earnings, which is salary + business profits + royalty income?

Should I use a SEP? Setup a 401k?  Something else?  (Or if anyone has a recommendation for a planner that charges a flat fee or hourly rate, I'd be interested in that too...)

Thanks!

Jason

You've misunderstood the SEP IRA contribution limits. It's 25% of compensation, up to a total contribution of $53k (for 2016).

How much can I contribute to my SEP?
The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of:

• 25% of compensation, or
• $54,000 for 2017 ($53,000 for 2015 and 2016 and subject to annual cost-of-living adjustments for later years).

[Emphasis mine]
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps-contributions

[Rufus.T.Firefly]

Background: This is the first year that I'm full time in my business.  I don't have any employees as I use all contractors.  I also got married this year.  Most of my income is actually royalty income.  My income exceeds the ROTH-IRA limits. 

Last year I opened a SEP-IRA, but I'm not sure if this is right for me long term.  What I liked about it was that you could contribute up to $53,000 a year or 25% of your income.  By the way, is that 25% of the salary I pay myself or 25% of all my earnings, which is salary + business profits + royalty income?

Should I use a SEP? Setup a 401k?  Something else?  (Or if anyone has a recommendation for a planner that charges a flat fee or hourly rate, I'd be interested in that too...)

Thanks!

Jason

You've misunderstood the SEP IRA contribution limits. It's 25% of compensation, up to a total contribution of $53k (for 2016).

How much can I contribute to my SEP?
The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of:

• 25% of compensation, or
• $54,000 for 2017 ($53,000 for 2015 and 2016 and subject to annual cost-of-living adjustments for later years).

[Emphasis mine]
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps-contributions

Yes, but see directly below in the next section which is titled "How much can I contribute if I’m self-employed?" and directs to the link I provided.

[johnny847]

Background: This is the first year that I'm full time in my business.  I don't have any employees as I use all contractors.  I also got married this year.  Most of my income is actually royalty income.  My income exceeds the ROTH-IRA limits. 

Last year I opened a SEP-IRA, but I'm not sure if this is right for me long term.  What I liked about it was that you could contribute up to $53,000 a year or 25% of your income.  By the way, is that 25% of the salary I pay myself or 25% of all my earnings, which is salary + business profits + royalty income?

Should I use a SEP? Setup a 401k?  Something else?  (Or if anyone has a recommendation for a planner that charges a flat fee or hourly rate, I'd be interested in that too...)

Thanks!

Jason

You've misunderstood the SEP IRA contribution limits. It's 25% of compensation, up to a total contribution of $53k (for 2016).

How much can I contribute to my SEP?
The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of:

• 25% of compensation, or
• $54,000 for 2017 ($53,000 for 2015 and 2016 and subject to annual cost-of-living adjustments for later years).

[Emphasis mine]
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps-contributions

Yes, but see directly below in the next section which is titled "How much can I contribute if I’m self-employed?" and directs to the link I provided.

And if I follow the worksheet on that page, I still don't get the result of being able to contribute "53k or 25% of income." Filling out the worksheet with $53000 on step 3 (that's net earnings from self employment, I get

3) 53000
4) 0.2
5) 10600
6) 66250
7) 10600
8) 53000

Now assume you've made elective deferrals (which would increase your maximum contribution)

9) 18000 (max allowed)
10) 35000
11) 18000
12) 9000
13) 9000
14) 44000
15) 18000

Assume no catch up contributions
19) 27000
20) 0
21) 27000

So that doesn't follow what I said earlier as 25% of compensation, up to a total cntribution of $53k, but it's still not equivalent to what the OP said either of "$53,000 a year or 25% of income."

[Rufus.T.Firefly]

So that doesn't follow what I said earlier as 25% of compensation, up to a total cntribution of $53k, but it's still not equivalent to what the OP said either of "$53,000 a year or 25% of income."

Actually yes, we agree. I think I misunderstood your previous post.