Mixed employment and investment/retirement options?

[Icarian]

Hey guys,

I'm a recently reformed wasteful spender. As I've gotten older I finally wised up, stepped off the consumerism treadmill, and decided that I'd like to retire before I'm dead. Thankfully, my wife is totally on board with this.

I've been doing some reading lately and have some ideas, but also confusion about what my options are as far as retirement investing. I'd greatly appreciate some help with figuring out the best way to tackle my next 6-7 years financially.  My info:

• Just turned 49 years old
• $57k employment income. I have a municipal pension plan with this employer. I am vested and will be able to draw a pension in 6 years. If I walk away at that point (55 years old) The pension will be $1,375 with a 3% yearly increase for life. There are no other retirement plans available through this employer.
• $49k self-employment income. I struggle every year with paying out the tax bill on this income. Surely there is a better way?
• Starting in 2017, I can comfortably invest $52k year for the duration.

From what I've been reading so far, it seems like I have more opportunities to invest in IRA and 401k options than the usual person with single employment. What, in your opinions, would be the best way to go about this?

 I am particularity looking for maxing out deductible contributions so as to reduce my tax bill, and hopefully getting my AGI low enough to take advantage of what will likely be the last year of the ACA subsidies on health insurance. Thanks for your input.

[DavidAnnArbor]

A Solo 401K plan is a great way to put the money into a deductible plan. Are you also putting money in a 403 B or 401k through your municipal government job?
Then if you lower the self-employed income enough as a result of the solo 401k you can also put money in a traditional IRA plan. Pick health insurance that enables you to put additional income into a Health savings account.

[SeattleCPA]

OK, so you know the saying that to someone holding a hammer, everything looks like a nail? Bear that in mind as you read and ponder my suggestion...

While I think the solo 401(k) idea is worthy, your comment about the ACA subsidy makes me wonder if you're buying your own health insurance. Or at least for some of your family. If that's case, I wonder about the option of using an S corporation for your self-employment income. I say this with some discomfort because as a CPA who does lots of S corp tax returns, I lack some objectivity here... I.e.,  I am the guy holding the hammer...

But if you buy $10K a year of insurance,  you might be able to form a small S corp. You'd maybe need to pay yourself $20K in wages. And those wages would be taxed just like $20K of self-employment income. I.e., you'd pay both income taxes and self-employment taxes/SS & Medicare taxes on them.

But you could with an S corporation put the $10K for health insurance on the S corp's tax return as a deduction (which though a convoluted bookkeeping process would save you both income taxes and self-employment taxes). Your employer pension contribution, in this example would equal 25% of the $20K of wages and 25% of the $10K of healthcare ... so that would equal about $7500 and would again save you both income taxes and self-employment taxes.

A couple of other notes... with this approach you'll have another $12,500 - ish of profit left over inside the S corporation which you could either leave in corp or draw out as a distribution. This may be "unreasonable" in the IRS's opinion... or maybe not. But there are other ways probably to get some of this money out without raising the eyebrows of the IRS.

In any case, you should via this approach save about $4500 a year of payroll taxes. That's pure savings. And you could use that money to make a spousal IRA contribution of probably nearly 6K for your wife. You need to find a local tax accountant who will do the S corp tax returns for a nice low price. But that should be doable.

A question is how you get your savings really up there like you want... But if you have a 403(b) available at your municipal employer, you might be getting pretty close to your objective if you contribute $18K or $24K to the 403(b)... plus your s corp does a $12,500 employer match to a 401(k) or maybe, simpler, a SEP... plus your spousal IRA maybe adds another $6K.

Maybe something to think about...

[Icarian]

A Solo 401K plan is a great way to put the money into a deductible plan. Are you also putting money in a 403 B or 401k through your municipal government job?
Then if you lower the self-employed income enough as a result of the solo 401k you can also put money in a traditional IRA plan. Pick health insurance that enables you to put additional income into a Health savings account.

There is no 403 B or 401k available through my employer. The only other option is something called "IMRF additional contribution savings program" where I can contribute up to 10% of gross pay into a savings program with the pension fund that offers 7.5% interest. No bad at all, but it is also not a deductible contribution.

[Icarian]

OK, so you know the saying that to someone holding a hammer, everything looks like a nail? Bear that in mind as you read and ponder my suggestion...

While I think the solo 401(k) idea is worthy, your comment about the ACA subsidy makes me wonder if you're buying your own health insurance. Or at least for some of your family. If that's case, I wonder about the option of using an S corporation for your self-employment income. I say this with some discomfort because as a CPA who does lots of S corp tax returns, I lack some objectivity here... I.e.,  I am the guy holding the hammer...

But if you buy $10K a year of insurance,  you might be able to form a small S corp. You'd maybe need to pay yourself $20K in wages. And those wages would be taxed just like $20K of self-employment income. I.e., you'd pay both income taxes and self-employment taxes/SS & Medicare taxes on them.

But you could with an S corporation put the $10K for health insurance on the S corp's tax return as a deduction (which though a convoluted bookkeeping process would save you both income taxes and self-employment taxes). Your employer pension contribution, in this example would equal 25% of the $20K of wages and 25% of the $10K of healthcare ... so that would equal about $7500 and would again save you both income taxes and self-employment taxes.

A couple of other notes... with this approach you'll have another $12,500 - ish of profit left over inside the S corporation which you could either leave in corp or draw out as a distribution. This may be "unreasonable" in the IRS's opinion... or maybe not. But there are other ways probably to get some of this money out without raising the eyebrows of the IRS.

In any case, you should via this approach save about $4500 a year of payroll taxes. That's pure savings. And you could use that money to make a spousal IRA contribution of probably nearly 6K for your wife. You need to find a local tax accountant who will do the S corp tax returns for a nice low price. But that should be doable.

A question is how you get your savings really up there like you want... But if you have a 403(b) available at your municipal employer, you might be getting pretty close to your objective if you contribute $18K or $24K to the 403(b)... plus your s corp does a $12,500 employer match to a 401(k) or maybe, simpler, a SEP... plus your spousal IRA maybe adds another $6K.

Maybe something to think about...

I get health insurance through my employer, but my family is not on it. It costs a little over $1,200 month to add my wife and child. So they've been on the ACA marketplace the last two years at approx. $700 month.

As for the S-corp idea, I was hoping to avoid a bunch of paperwork and convoluted legal stuff. Currently, the business is setup as a simple sole proprietorship with my wife and I listed as owners.

Am I reading correctly that I can contribute about 25% of net SE pay (approx 11,000 ea) for both myself and my wife into a SEP IRA, and then also contribute $5,500 to a traditional IRA, for a deductible total of around $33k between us?

[DavidAnnArbor]

The Solo 401k gets you there more easily in that you can each take an 18K employEE deduction from the business income.

[SeattleCPA]

Am I reading correctly that I can contribute about 25% of net SE pay (approx 11,000 ea) for both myself and my wife into a SEP IRA, and then also contribute $5,500 to a traditional IRA, for a deductible total of around $33k between us?

Your SE pay only produces one 25%-ish match... and it'll really be 25% after the 25%... so more like 20%. (On $44K, then, you're talking roughly $8800 for the proprietor and that's you, I think.)

Assuming you are the proprietor, you should also be able to do a spousal IRA which will be another $5500. Or $6500 depending on spouse's age.

I assume you have a 403(b) option at work and that you use that to "burn off" part of your elective deferral... if that's the case, I kinda don't think a 401(k) for you gets you anything additional...

BTW if the proprietor is your wife, she could do a 401(k) with the $8800 ... and then she could also do $18,000 elective deferral. That'd be 26,800. And note that if you have something like a 403(b) at your job, what you contribute to that will represent additional savings. I.e., you could maybe do another $18K there... perhaps get a match, etc.

[DavidAnnArbor]

There is no 403 B or 401k available through my employer.

I assume you have a 403(b) option at work and that you use that to "burn off" part of your elective deferral... if that's the case, I kinda don't think a 401(k) for you gets you anything additional...

BTW if the proprietor is your wife, she could do a 401(k) with the $8800 ... and then she could also do $18,000 elective deferral. That'd be 26,800. And note that if you have something like a 403(b) at your job, what you contribute to that will represent additional savings. I.e., you could maybe do another $18K there... perhaps get a match, etc.

No 403b at his work.

[SeattleCPA]

There is no 403 B or 401k available through my employer.

I assume you have a 403(b) option at work and that you use that to "burn off" part of your elective deferral... if that's the case, I kinda don't think a 401(k) for you gets you anything additional...

BTW if the proprietor is your wife, she could do a 401(k) with the $8800 ... and then she could also do $18,000 elective deferral. That'd be 26,800. And note that if you have something like a 403(b) at your job, what you contribute to that will represent additional savings. I.e., you could maybe do another $18K there... perhaps get a match, etc.

No 403b at his work.

Ok, sorry, missed that... so I think David is right... solo 401(k)... :-)