Author Topic: Consulting and Retirement Saving  (Read 3897 times)

treehugger

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Consulting and Retirement Saving
« on: July 08, 2014, 08:25:18 PM »
Over the last 3 years I have begun doing consulting/freelance work. I am trying to buckle down on our finances and up our retirement savings. I have a traditional IRA that I contribute but am looking into ways to save additional funds in other retirement accounts for the tax savings. I have been researching Solo 401ks and SEPIRAs. I am wondering what peoples thoughts are on these options, is one better than the other and also want to confirm that as an independent consultant I can indeed open such an account. From my reading on Vanguards site, it seems I can.  I don't make a too much of money doing this work, about $20,000 annually.

I am married and have two children. My husband is a public school teacher with a pension. He has access to a 403(b) as well which I'm trying to convince him to look into further.

I feel somewhat clueless about this and really want to improve on my knowledge. I have asked my father, who I thought was pretty savvy about finances but he's not as helpful as I thought so any good resources besides this website that are out there I should be reading or using please point me that way. Things seem a bit more complicated when you earn money that doesn't result in a W2 or a 1099.

bacchi

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Re: Consulting and Retirement Saving
« Reply #1 on: July 08, 2014, 09:06:34 PM »
How do you earn money if not from a 1099 or W2? Do you sell actual physical goods and have inventory and depreciation, etc.?

treehugger

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Re: Consulting and Retirement Saving
« Reply #2 on: July 09, 2014, 06:46:10 AM »
No I do not sell anything the main organization I do work for has not provided one. I still have to show the money as earned income on my taxes and would like to shelter more from taxes while also increasing my retirement savings. Therefore I was looking into additional retirement options.

matchewed

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Re: Consulting and Retirement Saving
« Reply #3 on: July 09, 2014, 06:50:04 AM »
If you are the business owner and the employee within the same company you can do a Solo 401k. http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans

A SIMPLE IRA is between an employer and employee who doesn't have a 401k system set up. But it needs to be through the employer. http://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-SIMPLE-IRA-Plan

treehugger

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Re: Consulting and Retirement Saving
« Reply #4 on: July 09, 2014, 06:55:53 AM »
Thanks for the information!

JGB

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Re: Consulting and Retirement Saving
« Reply #5 on: July 09, 2014, 07:09:00 AM »
Assuming that no one but you and your spouse work for the business, I would definitely vote for the Solo 401k. That is what I have set up for my side business, and so far, I have been very happy with it. Here are some of the reasons why:

  • Higher limits - Last year my wife and I each contributed $10k, which led to paying nothing in federal/state income taxes for the money we made from the business. There's no other non-employer-based program that would let us shelter $20k in income.
  • Higher limits (v 2) - since you can also contribute from the employer side, you have the potential to sock away very large sums of money without ever having to pay income tax on it. $17,500 per year per person (on the employee side), plus a total of 25% from the employer side. That means that if your spouse is in the business with you, you could potentially make $43,750 and pay no income taxes on it (if all of that were saved into the program).
  • Social Taxes - As a business owner, you are responsible for both the employee side of Social Security/Medicare tax AND the employer side. That means you have to pay twice as much. However, the 25% employer contribution is treated as a business expense before social taxes are calculated. That means that you can lower the amount of social security/medicare that you pay on the business profit by 25% if you max out the employer side of the contribution.

Just to reiterate that last point: if you do the solo 401k, make sure you do the 25% employer contribution before contributing from the employee side. We didn't realize the impact this would have made last year, and could have saved an extra $750 (15% of 25% of the $20k we made) if we had contributed it on the employer side instead of the employee side.

ToughMother

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Re: Consulting and Retirement Saving
« Reply #6 on: July 09, 2014, 07:19:23 AM »
I'm just starting consulting this year too in addition to my regular salaried gig and have been reading a lot about solo 401Ks (I liked the higher limits).  Also, get them set up and contributed to by Dec 31.  You do not have until April 15 the following year like you do with other tax-deferred savings vehicles.

Thanks for the great info, JGB, especially around the employer side V employee side of social security/medicare taxes. 

treehugger

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Re: Consulting and Retirement Saving
« Reply #7 on: July 09, 2014, 07:24:34 AM »
Wow, thanks so much JGB! So just to clarify, when you say to differentiate between the employer and employee contribution, I assume there's a way to designate that when you put the money into the account? I definitely need to spend some time getting more familiar with the details of self employed income.

Toughmother, I do remember reading that it has to be set up by the end of December. Thanks for the reminder.

bacchi

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Re: Consulting and Retirement Saving
« Reply #8 on: July 09, 2014, 09:17:45 AM »
No I do not sell anything the main organization I do work for has not provided one. I still have to show the money as earned income on my taxes and would like to shelter more from taxes while also increasing my retirement savings. Therefore I was looking into additional retirement options.

If they pay you over $600, they have to provide a 1099.

In any case, I agree with creating the solo 401k. When you contribute, you can designate whether it's an "employee" or "employer" contribution. Also, the maximum profit sharing is 20% unless you're incorporated.

JGB

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Re: Consulting and Retirement Saving
« Reply #9 on: July 09, 2014, 10:30:27 AM »
When you contribute, you can designate whether it's an "employee" or "employer" contribution.
Yep. In the one I have with Vanguard, it is as simple as choosing which section of the form to fill out.

Also, the maximum profit sharing is 20% unless you're incorporated.
Can you provide a source on that? Nothing I have read or heard from my accountant made any mention of a rule like that. I would like to research it further to see how it impacts my situation.

bacchi

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Re: Consulting and Retirement Saving
« Reply #10 on: July 09, 2014, 12:05:24 PM »
Can you provide a source on that? Nothing I have read or heard from my accountant made any mention of a rule like that. I would like to research it further to see how it impacts my situation.

Page 9 http://www.irs.gov/pub/irs-tege/forum08_401k.pdf

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Schedule C sole-proprietors must do an added calculation starting with earned income to determine their maximum contribution, which, in effect, brings the maximum 25% of compensation limit down to 20% of earned income.

http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans

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Contribution limits for self-employed individuals

You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

    one-half of your self-employment tax, and
    contributions for yourself.

Finally, there's 560, referred to by the above link, http://www.irs.gov/publications/p560/ch05.html. It shows a maximum profit sharing of ".200000*" for the self employed.


Cassie

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Re: Consulting and Retirement Saving
« Reply #11 on: July 09, 2014, 12:28:48 PM »
Your hubby should put $ into his 403 B.  It will grow nicely & you will be glad you did when you retire.