Options for 1099 income to reduce tax liability?

[sjc0816]

I started working in a freelance capacity this year and I'm looking for ways to lower our tax liability. I had no idea how much money I was going to make, so didn't pay quarterly taxes. I ended up making around 12-13k of 1099 income.

DH grosses around 128k and maxes his 401k. We over-withheld on his W2 income some in anticipation of my new business....but I'd guess we will still owe.

Can we put some money into a tIRA to try and offset this? I'm a little confused about the income cap on the tax deduction..and whether we would not get the deduction based on AGI.

Are there any other options for us? I'd love to save it rather than pay it if possible....but of course we will pay what we owe.

Just looking for some advice.

[terran]

Since you are not covered by a retirement plan at work, but your husband is and your AGI is under $184k, you can contribute to a fully deductible IRA, but your husband cannot, so he would be better off contributing to a roth.

It's too late for 2016, but if you intend to to continue with your business, you may want to consider opening a solo 401k (fidelity and vanguard are both good options for this), which would allow significantly higher contributions. Keep in mind that in this case you would be covered by a retirement plan at work, so you would likely not be eligible for a deductible IRA contribution at your income level.

[sjc0816]

Am I too late to set up a SIMPLE IRA for tax year 2016? I'm specifically looking for a way to lower our liability for 2016. I know for TIRA, you can contribute for the previous tax year until April 15th of the following year....but not sure if the same rules apply for SIMPLE.

[boarder42]

you could do a SEP IRA as well.  i used to do that for my daily fantasy earnings.

[terran]

Am I too late to set up a SIMPLE IRA for tax year 2016?

Yes, it looks like the deadline for a SIMPLE IRA was October

you could do a SEP IRA as well.  i used to do that for my daily fantasy earnings.

Oh, good call. You can open a SEP until the tax filing deadline.

Given that, I would open up a SEP IRA for 2016 at fidelity, fully fund it and a traditional IRA, then up a solo 401k also at fidelity with an effective date of January 1, 2017 and have them roll the SEP into it (fidelity allows this, vanguard does not).

You can mess around with this to see why a solo 401k is a better choice for the future: http://www.bankrate.com/calculators/retirement/self-employed-401-k-calculator.aspx -- Your $12k of net income (after expenses) will allow a $2230 contribution to a SEP, but would have allowed $11,152 to a SIMPLE or solo 401k. If your income rises this year, to say $24k you'll be able to put more in the 401k than the SIMPLE ($22,304 vs $13,149 and only $4460 for the SEP). The Solo 401k remains the top option until around $276k where the SEP catches up to the same limit.

[sjc0816]

Thank you so much for the advice.

I have a very old rollover IRA at Vanguard with about $3,500 in it....can I contribute the $5,500 to that? Or am I better off going with Fidelity?

[boarder42]

if you're already at vanguard why not just stay there. no reason to switch to fidelity.  oh nvm i see why above.

[terran]

Thank you so much for the advice.

I have a very old rollover IRA at Vanguard with about $3,500 in it....can I contribute the $5,500 to that? Or am I better off going with Fidelity?

Yeah, I probably would. I've read that employer sponsored 401(k)'s (not the solo 401k) and IRAs rolled over from them have better liability protection in some states than pure IRAs, but with only $3500 I wouldn't worry about it.

I'd still open the SEP at fidelity and roll it straight into the solo 401k you'll open shortly later so it's all in the same place, but they could help you roll a SEP from vanguard in too, or you could probably just leave a SEP open at the same time as the solo 401k, although you should check on that in case there's anything against having two "employer" plans open at the same time.

As long as having a SEP and solo 401k open at the same time is ok (again, check with whoever you open the solo 401k with), then you  could also just leave the SEP open in which case vanguard vs fidelity doesn't really matter. The Fidelity advantage is really just that it accepts rollovers and has lower expense ratios available (not that the vanguard investor class shares are bad by any means).

[sjc0816]

If I set up a SEP IRA - would that eliminate my ability to fully deduct a TIRA?  Since it's considered an employer plan? I can only contribute 25% of net to a SEP IRA.....but can deduct the full $5500 of a TIRA as long as I am not eligible for an employer plan. So the TIRA is a better move if that is the case.

Or does that rule not apply when it's a self-employed retirement plan?