Which small business retirement account?

[Bikesy]

Hey Team,

So I've read lots of material on self employed retirement plans but I'm still struggling to find the right choice for DW.  I'd love to get some input.  Stats are below:


Income: 10k-20k (If this changes it will be down as we are expecting our first child)
Business Expenses: 25% of revenue approx.

We would like to be able to defer as much of her income as possible.  Not sure if it matters but we currently max out my 401k and HSA and 2 tIRAs.

So what say you mustachians?

Thanks!

[terran]

Does your wife's business have any employees? If not, then a solo 401k is definitely the way to go. She can contribute 20% of income after expenses as an employer contribution and then whatever is left up to $18k. So in your wife's case she'll have to pay self employment tax and the expenses you mention, but everything else could go into the 401k. Here's a calculator that might be helpful http://www.bankrate.com/calculators/retirement/self-employed-401-k-calculator.aspx

[Bikesy]

Thanks for the calculator, that's very helpful.  She has no employees and probably never will.  Looks like the only fees on the vanguard solo 401k is a $20 annual charge per fund.  Definitely worth the tax savings!

Thanks! 

[terran]

Two things about the vanguard solo 401k:

1) They'll waive the fee once you reach some status (flagship maybe) which happens when your whole household has 50k with them.

2) You can only invest in investor class shares, not the lower expense ration admiral class. Doesn't matter if you're doing a target date, but it would if you want to do total stock, total bond, or the international equivalents. I'm leaning towards going with fidelity, which has the spartan funds that are similar to vanguard and do allow you to use advantage class (like admiral class) in the solo 401k.

[Retired To Win]

Also check the possibility of doing an SEP-IRA.  With one of those, your wife (wearing her employer hat) can contribute up to 25% of her employee's (herself wearing her employee hat) salary to the SEP-IRA.  The special twist to this is that the contribution is not considered to be part of the employee's income, so it is not subject to social security/medicare taxation.

Check it out for yourself over at irs.gov and see what you think.

[terran]

I think it's possible that's true for incorporated businesses, but not sole proprietorships. Solo 401k's might have the same provision as well. I seem to remember something about 25% when incorporated and 20% when not with both of them. Might be worth looking into, although the solo 401k definitely lets you put away the most at lower incomes.

[Bikesy]

I obviously need to continue to read up on the subject.  We've got enough in our household accounts with Vanguard that our fees would be waived.  I just wasn't aware that all of our household accounts would be included in that.  Any plan that only allows a specific percentage of salary/income to be deferred would be less than ideal seeing as we're talking about such a small amount every year.  I'm not as much concerned with the ability to defer a large amount, but rather the ability to defer 100% of a relatively small amount if that makes sense.