Author Topic: SEP 401K vs individual for 2018 if I'm not self employed 2019?  (Read 481 times)

zoochadookdook

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Hey all, doing my taxes for 2018. I was mainly self employed through a llc and while I contributed to my roth all year-I hadn't opened a sep or such. I made around 34,000 from the llc and 5000 from w2s. This year I have a job (just w2 contractor for now) but looking for a 401k matching job. Would it make sense to contribute to a 401k sep plan for 2018 right now and take the tax break/transfer it later (looks like i could only maximize my break with 4000 contribution)? Another option I am looking at is contributing my maximum to a individual 401k plan (18,500 max plus profit sharing=20,700- will bring my taxes due down 500/state refund up 1000). I'm not sure what the pluses and negatives to each.

I have a weird financial situation right now as I just sold most of my llcs assets so I can pursue higher employment this year. Age 26 (27 in may)

 assets: (I have around 1600 of this in stocks/bitcoin which I can sell whenever)
--$68,750 (mostly in checking/savings accounts)
Roth IRA
--$26,300 (1800 contributed 2019, 4200 still to do)

Debts
--5500 in credit cards which will pay off mid this month
--13200 in student loans that interest starts accumulating in july 4% (I plan on paying off with 3 credit cards and getting another 2400 off in reward cash back)
--$2500 2018 taxes (I owe about that, hope to submit this weekend)
-mortgage $112000@5% (purchase price was $141k  market says 180/looking to refinance fixed end of this year lower)

This puts me at around $50,000 cash/$26000 ira after all debts are paid down.

My living expenses:
$1200/month (mortgage, taxes, insurance, utilities).
$200 Assorted, gas food etc.
Roth ira contribution $580 or so
health insurance $150

Current income:
$3000/month post tax (no benefits, entry level hourly).

Any advice on what I should be looking to 401k wise? I'm not leaving the door to being self employed closed forever-just temporarily while I look for flexible or much better paying jobs (self employed I would net around 35k a year/working maybe 10 hours/week).
« Last Edit: April 11, 2019, 09:33:31 AM by zoochadookdook »

terran

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Re: SEP 401K vs individual for 2018 if I'm not self employed 2019?
« Reply #1 on: April 11, 2019, 10:53:06 AM »
I think you might have a slight misunderstanding about the self employed retirement plans available to you. It's too late to open a solo 401(k). They must be opened by Dec. 31 of the year for which you'd like to make contributions, although contributions can be made until your tax filing deadline. You can, however, open and fund a SEP IRA any time up until the tax filing deadline for the year for which you're making contributions. I think that would be a good idea, although I suppose one could make an argument for paying off debt instead.

One thing to note about the SEP IRA (unlike the solo 401(k)) is that it creates IRA basis just like a non-self-employed traditional IRA which interferes with making backdoor Roth contributions if your income ever becomes high enough to make that necessary.

One other thing to note is that SEP IRA contributions (and solo 401(k) contributions) are now "less good" starting with 2018 because the the new Qualified Business Income deduction, so the marginal tax rate savings is now 20% lower (worse) for a SEP IRA than it would be for other tax deferred accounts (like a traditional IRA) since it reduces your QBI deduction.


zoochadookdook

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Re: SEP 401K vs individual for 2018 if I'm not self employed 2019?
« Reply #2 on: April 11, 2019, 11:31:59 AM »
I think you might have a slight misunderstanding about the self employed retirement plans available to you. It's too late to open a solo 401(k). They must be opened by Dec. 31 of the year for which you'd like to make contributions, although contributions can be made until your tax filing deadline. You can, however, open and fund a SEP IRA any time up until the tax filing deadline for the year for which you're making contributions. I think that would be a good idea, although I suppose one could make an argument for paying off debt instead.

One thing to note about the SEP IRA (unlike the solo 401(k)) is that it creates IRA basis just like a non-self-employed traditional IRA which interferes with making backdoor Roth contributions if your income ever becomes high enough to make that necessary.

One other thing to note is that SEP IRA contributions (and solo 401(k) contributions) are now "less good" starting with 2018 because the the new Qualified Business Income deduction, so the marginal tax rate savings is now 20% lower (worse) for a SEP IRA than it would be for other tax deferred accounts (like a traditional IRA) since it reduces your QBI deduction.

ah got it. So my only option is a SEP and the maximum to get my max deduction is only about 4000 in that account.

As far as debt I have those 0% student loans that I was planning on churning 3 credit card bonuses through to pay off (should get around 2400 back while paying them off) by july. Hence me holding onto those.

I did pay off all CC debt this week.

I'm actually taking less deductions this year in an attempt to keep my AGI around 28-30k for a mortgage refinance the end of this year. Any idea if a SEP affects the AGI? Sorry came from a not super financial family background and haven't really done much aside from save it.

terran

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Re: SEP 401K vs individual for 2018 if I'm not self employed 2019?
« Reply #3 on: April 11, 2019, 12:05:10 PM »
Yes, SEP would lower AGI. It comes off schedule 1, which is also where business income is added, and then flows to line 6 of form 1040. AGI is line 7, after your standard or itemized deduction is taken.

I can't speak to this myself, but I would confirm that AGI is all they will look at for the refinance. Especially since you have (had) self employment income they may look actual business income or some such. I would think they would understand that money you chose to put in a tax deferred account is money that could have gone towards mortgage payments if needed, just like I would think they'd consider employer plan contributions reflected on a W2 as part of your income. I could totally be wrong though.

zoochadookdook

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Re: SEP 401K vs individual for 2018 if I'm not self employed 2019?
« Reply #4 on: April 11, 2019, 12:07:43 PM »
Yes, SEP would lower AGI. It comes off schedule 1, which is also where business income is added, and then flows to line 6 of form 1040. AGI is line 7, after your standard or itemized deduction is taken.

I can't speak to this myself, but I would confirm that AGI is all they will look at for the refinance. Especially since you have (had) self employment income they may look actual business income or some such. I would think they would understand that money you chose to put in a tax deferred account is money that could have gone towards mortgage payments if needed, just like I would think they'd consider employer plan contributions reflected on a W2 as part of your income. I could totally be wrong though.

interesting, I'll have to confirm. The thing is my current "mortgage" is just a loan against my fathers 401k (he's on the title but it's variable) I want to refinance to get a fixed rate and his name off the title. He doesn't care either way but it's the prime rate - like a 1/4 point or so currently. I could get either a standard mortgage or a different loan as there is no actual mortgage on the property currently.