Self-employment - Contributing to IRA?

[mustachedali]

Hello, newbie here. I live abroad but I'm American and I am registering my own LLC.

• What is the best structure for a tax-free retirement savings plan?
• Is there a way to contribute my taxable self-employment income to go to my retirement savings?

Thanks!

[jpdx]

Yes! There are a few options, such as a SEP IRA or Individual 401k. Start by googling those and you'll learn the differences.

I use a SEP IRA, just for the relative simplicity. A self-employed person can contribute 20% of their business profit. I think it's 25% if you're an employee-owner. And you can still do your regular IRA contribution of $5500 on top of that.

[angelleye]

I would recommend a Solo 401k.  You can set up both Roth and Traditional, and you can contribute up to $18k as an employee as well as 25% of the salary you're paying yourself as Employer match (up to a max combined contribution $54k).  You can still IRA separate from that, too.

[mustachedali]

I would recommend a Solo 401k.  You can set up both Roth and Traditional, and you can contribute up to $18k as an employee as well as 25% of the salary you're paying yourself as Employer match (up to a max combined contribution $54k).  You can still IRA separate from that, too.

Would a Solo 401k work well for an LLC?

[rockwater]

I'm wondering about this as well.

Had started a Roth prior to being self-employed, but curious what my best options are for efficient contributing.

Keep contributing to roth? Convert to SEP? Start a new IRA/401k?

[bacchi]

I would recommend a Solo 401k.  You can set up both Roth and Traditional, and you can contribute up to $18k as an employee as well as 25% of the salary you're paying yourself as Employer match (up to a max combined contribution $54k).  You can still IRA separate from that, too.

Would a Solo 401k work well for an LLC?

Yes. Most brokers will require an EIN even if it's a pass-through.

[mustachedali]

I'm wondering about this as well.

Had started a Roth prior to being self-employed, but curious what my best options are for efficient contributing.

Keep contributing to roth? Convert to SEP? Start a new IRA/401k?

Yes I hear you! I've been seeing some options for a roth solo 401k which changes the mix. A lot of info to sift through and research for providers.

[Fi365]

I'm fairly new to these topics myself, but here's what I've learned so far...

I turned my side hustle into a full-time LLC three years ago. I have a separate EIN for my LLC (it's basically a social security number to identify your business).

Zero plans for employees. In fact, that's my worst nightmare. I subcontract small things (a few thousand dollars here and there) but will never employ anyone other than myself. Whether you have employees or not is a consideration in what type of retirement plan you choose.

Last year, being frustrated that I couldn't contribute more to retirement and not knowing what to do with my extra money, I finally realized that SEP IRAs and solo 401s exist. Oops! Most of my freelancer friends are totally broke... let alone saving for retirement... so it simply wasn't on my rader.

I opened a SEP IRA because my accountant and business coach recommended it to me. They said I could contribute up to $50,000 (or whatever the limit is--it changes each year) and that should be plenty. Well, neither the accountant or the business coach are aware of the FIRE community. They're on the "retire at 62 cuz that's early, right?!" track.

Based on my 2017 net business income of ~$193,000, I think I'm able to contribute ~$36,000 to my SEP IRA. I've put in $10,000 so far and plan to put in more for the 2017 year this April when H&R Block finishes my taxes and I figure out the exact max.

$36,000 in a SEP IRA is great, but I think the individual 401k will be even better. I'm probably going to open one this year in 2018 and start contributing to it next year in 2019. My understanding is that I can contribute the $18,500 as an employee AND 20% or 25% or whatever as the employer. It should allow me to contribute around $50,000 total.

I'm not sure how to access either of these options prior to 59.5. There are probably tons of posts on this topic already. One of my 2018 to-do list items is to research this topic more.

Good luck on your learning journey! Hopefully my story helps you understand what others are considering.

[neo von retorch]

Last year I started a single-member LLC, as my full-time work transitioned (for now) into the realm of 1099 pay.

You can contribute up to the employee maximum ($18,500 for 2018), and you can contribute up to 20% of net profits as your own employer (up to a combined total of ~$54,000).

Since I haven't been doing it for very long, I still have some things to figure out - mostly I'll calculate my maximums when I calculate my taxes this spring, and then make sure I'm maxing out where I can!

The best part, in my opinion, is that you can open a Solo 401(k) with Vanguard, and choose really great funds!

[rockwater]

I'm wondering about this as well.

Had started a Roth prior to being self-employed, but curious what my best options are for efficient contributing.

Keep contributing to roth? Convert to SEP? Start a new IRA/401k?

Yes I hear you! I've been seeing some options for a roth solo 401k which changes the mix. A lot of info to sift through and research for providers.

bumping this. hoping to get some more feedback.

[neo von retorch]

Uhh... open a solo 401(k). Put up to $18,500 pre-tax in there in 2018. As your own employer, you can also put up to 20% of net profit in as an employer match (aka Profit Share, also pre-tax).

[Much Fishing to Do]

I'm wondering about this as well.

Had started a Roth prior to being self-employed, but curious what my best options are for efficient contributing.

Keep contributing to roth? Convert to SEP? Start a new IRA/401k?

Yes I hear you! I've been seeing some options for a roth solo 401k which changes the mix. A lot of info to sift through and research for providers.

bumping this. hoping to get some more feedback.

I opened a solo 401k at vanguard and its been great.  I make too much for a Roth IRA (directly at least) but there is a ROth 401k avail.  Basically in the years I dont make as much I contribute my employee side to the ROth 401k (the employer side always has to go to a traditional) and in the years I'm in higher tax brackets I contribute all to the Traditional.  The last 3 years have made enough to max them out, so thats over $150k put away in 3 years, plus with the growth we've had in the market those 3 years contributions alone are nice pots now.  I don't see the whole "simplicity" argument anymore re: the SEPs vs solo 401k ever since Vanguard and others like started offering these...they are very easy to set up and maintain.

[Slow&Steady]

We are probably going to need to look into this over the next couple of years.  I anticipate income from DH's business will start pushing us out of our current tax bracket and I will want to contribute more of the business income to retirement investments.  Can I throw in several more questions on this?

We anticipate being in the 12% tax bracket for 2018 and our plan for now is to just contribute to his regular Roth IRA.  A good portion of the business money will be "reinvested" in the business this year with equipment/advertising/etc so I don't think we need to put anything else in tax deferred accounts (above my 401k contributions).  Am I thinking about this incorrectly?

Does it make sense to open a solo 401k or an SEP IRA if you don't actually anticipate maxing them out?  For instance I anticipate the company to have a revenue (not profit) of something between $30k-$40k in 2018.  My income is high enough that in the next few years I anticipate this business to push us into the next tax bracket (as stated above), if we are about to be bumped to the next tax bracket we should contribute to a tIRA (vs the Roth we currently utilize) until that no longer helps us maintain our current tax bracket and then switch to a solo 401k or SEP IRA?

I understand there is a phase out for the tIRA but I think that would be after we cross into the next tax bracket.  I think below kind of sums up my questions, is that thought process flawed?

0-12% tax bracket = Contribute to Roth IRA
22% tax bracket = Contribute to tIRA if it keeps us in the 12% tax bracket
22% tax bracket = Open a solo 401K or SEP IRA if need more room than tIRA to stay in 12% tax bracket
22% & up tax bracket = Max everything to reduce tax liability

Uhh... open a solo 401(k). Put up to $18,500 pre-tax in there in 2018. As your own employer, you can also put up to 20% of net profit in as an employer match (aka Profit Share, also pre-tax).

Do you have a certain time frame to determine the actual 20% of net profits after the beginning of the following year?  Do you have to try to do this accounting in Dec and get that contribution put in there before the end of the year?

[neo von retorch]

From my understanding of the IRS regulations, employee deferrals must be completed with the final 2017 paycheck. However, the employer "profit share" contribution can be made by the tax deadline.

[SeattleCPA]

You don't want to operate as an S corporation until you're pretty established, but you might find this discussion of pension plan choices for small businesses operating as S corporations useful:

http://www.scorporationsexplained.com/what-pension-plans-are-available-for-Scorporation.htm

Note: If you can legitimately use an S corporation, you usually benefit from doing so--even if it means you don't get to stuff as much into your pension plans.

You might also want to make sure you understand or know about the permanency requirement before you go with a solo 401(k). I discuss that in this blog post (about two-thirds of way through the discussion):

https://evergreensmallbusiness.com/hidden-small-business-pension-plan-costs/