Author Topic: Retirement strategies for indepdent workers  (Read 6248 times)

jaydedman

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Retirement strategies for indepdent workers
« on: February 01, 2014, 11:51:17 AM »
Iím learning quite a bit going through the archives of this investing forum section. Answering a lot of my own questions. Great resource.

However it does seem like most folks here are working for companies with 401k plans where their employer contributes. Amazing. Plus they contribute to a Roth IRA. Great ways to squirrel away money tax free. This is how MMM says how he did it. 401k's for the win.

Iím an independent contractor. I get 1099íd at the end of the year from anyone I work for. I'd never trade my independence, but wondering about what vehicles independent people can use to avoid taxes, especially since I don't get that extra bump is savings from an employer.

I know I can put $5500 into a traditional IRA each year. Iím also good about legally expensing everything business related to bring down my taxable income. But since I canít get a 401k plan through a company, do I have any other choices? Someone mentioned a SEP account. From what I read, I either do a SEP account or an IRA. Not both.

Also, currently I just have a General Partnership with another independent contractor where we just split any taxable income at the end of every year. Do I have to create some kind of LLC and pay ourselves wages to do a SEP?

Anyone have experience saving tax-free as an independent worker?

Bruno

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Re: Retirement strategies for indepdent workers
« Reply #1 on: February 01, 2014, 12:39:31 PM »
It depends a bit on how your contractor business is run registration/tax wise. Any accountant will be happy to tell you the details.
SEP is a good choice, especially since you have very high contribution limits.

jaydedman

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Re: Retirement strategies for indepdent workers
« Reply #2 on: February 01, 2014, 12:54:24 PM »
Thanks for the response. I have a General Partnership with my partner. It's simple. We subtract all our expenses and then split the income, doing our own personal taxes.

Yeah, doing my taxes with our accountant yesterday. He said he could handle any completed paperwork we threw at him, but he said go to a financial advisor to set it all up.

I just found this article:
http://www.obliviousinvestor.com/sep-vs-simple-vs-solo-401k/
There's a difference between a SEP/IRA vs a Simple IRA vs Solo 401k.

The Solo 401k sounds like the best option that has the greatest amount of yearly contributions...but it doesn't sound simple. I assume that everyone here does their own investing without any kind of paid advisor. Anyone here set up a Solo 401k on their own? What's the paperwork like?

It's unclear if I can just have a General Partnership, or if I need to set up a LLC for the business.

Carrie

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jaydedman

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Re: Retirement strategies for indepdent workers
« Reply #4 on: February 01, 2014, 01:13:29 PM »
Cool. appreciate this link. Should have known Vanguard was the place to go.
If anyone has experience actually setting one of Solo 401k's up and has any pros/cons to share. I'd love to hear it.

Edit: answering my own question. I found a conversation about it here: http://www.bogleheads.org/forum/viewtopic.php?p=1128695

jaydedman

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Re: Retirement strategies for indepdent workers
« Reply #5 on: February 01, 2014, 01:48:40 PM »
I'll just do my own follow up in case anyone in the future lands here from a search.

If you want to set up a Solo 401k for your business, here's the difference if you're an LLC or a Sole Proprietor:

The contributions to Solo/Individual 401(k) depend on how the business is organized. If you're an S Corp and pay yourself a W-2 Salary, your employer profit share contributions are based on a percentage of salary (0-25%) and does not require that the S-Corp be profitable. The S-Corp can show a net loss and still make employer profit share contributions up to 25% of W-2 salary.

It is a different for a sole proprietor. The employer profit share contributions for a sole proprietor are based on a percentage of adjusted net business income (gross self employed income minus business expenses minus 1/2 of self employment tax).


Vanguard seems to have all the paperwork online you need to do to set it up...and then give an accountant.

Carrie

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Re: Retirement strategies for indepdent workers
« Reply #6 on: February 01, 2014, 02:27:01 PM »
I want you to know that because of your question, it made a lightbulb go off in my head.

I had some self-employment income (I'm an independent contractor, working part time), and was about to be hit with a sizable income tax bill.  Well... since I went on to the vanguard site to get that link to share, I thought ... why don't I open one and put my profit there?
So, it appears that if I max out what I'm able (turbo tax calculated my max allowable contribution for me), then I will be able to reduce my tax bill by about $1500!  All while increasing my retirement savings!  WIN!

I'm going to open my own individual 401k this week too. 


eta:
I think I might be screwed on this for 2013, I may have to plan on this for next year instead.
« Last Edit: February 01, 2014, 02:39:29 PM by Carrie »

jaydedman

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Re: Retirement strategies for indepdent workers
« Reply #7 on: February 01, 2014, 02:33:28 PM »
Awesome. I won't be setting mine up after this tax season...so please share any updates with your experience. I'm still confused how Vanguard helps you determine your potential contribution.

It's also unclear to me how it works when you are the employer and the employee. Like, does it matter if the "business" contributes more vs the "employee"? It's all the same money.

I'm sure it'll make sense once I get into the paperwork, but I like people's experience about any pitfalls.

iamlindoro

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Re: Retirement strategies for indepdent workers
« Reply #8 on: February 01, 2014, 05:58:04 PM »
https://forum.mrmoneymustache.com/investor-alley/sole-proprietorship-and-individual-401k/

In short, you can see me (and a couple of others) go from question asking through to opening solo 401(k)s through Vanguard in that thread, answering much of what you've touched on here.  In short, setup w/ Vanguard was easy, I've found that the concerns about paperwork overhead to be completely unfounded, and I'm completely convinced that the Solo 401(k) is the ultimate weapon in the self employed mustachian's arsenal. 

No, it doesn't matter that the "employer" contributions are more than the "employee" contributions-- in fact, that what it's designed to allow.  The thread above has a number of links to calculators on the max you can put in based on your income and employment type (Sole Proprietor vs. S-Corp).  If you make enough, you can put 17.5K in for yourself, and 33.5K as your "employer" in a year.  AND your spouse can participate in the plan, bringing the maximum possible deduction to a whopping 102K!  The reduction is your personal income tax is the employer PLUS the employee amount (So you get a deduction of the full 51K/102K-- which is freakin' awesome).  If you are an S-Corp, it *also* reduces your self employment tax since the employer portion is deductible as a business expense for S-Corps (If you're a sole proprietor, you still pay SE taxes on the amount earned, but this is still a massive improvement over a company 401(k)).
« Last Edit: February 01, 2014, 06:01:50 PM by iamlindoro »

foobar

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Re: Retirement strategies for indepdent workers
« Reply #9 on: February 01, 2014, 10:36:29 PM »
Being an independent worker is a big win. The 2 basic choices are SEP and 401(k). Both have the same max (~51k) but you need to make like 250k to max out the SEP while you can make out the 401(k) with a mere 135k of income. The SEP does have less paperwork. And you can do normal IRA on top of either of them.



Cool. appreciate this link. Should have known Vanguard was the place to go.
If anyone has experience actually setting one of Solo 401k's up and has any pros/cons to share. I'd love to hear it.

Edit: answering my own question. I found a conversation about it here: http://www.bogleheads.org/forum/viewtopic.php?p=1128695

bacchi

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Re: Retirement strategies for indepdent workers
« Reply #10 on: February 02, 2014, 12:53:41 AM »
The solo 401k paperwork at Fidelity and Vanguard is boilerplate. They send the forms and you sign and return them or, in some cases, file them away. If Congress changes the plan, Vanguard will send along additional paperwork to sign and return/file. Don't neglect this.

The "employee" vs. "employer" contribution only matters if you make less than the maximum for matching. I usually dumped up to the $17500 limit until late in the year when I was more sure of my annual income for matching purposes.

It's the best reason to be self employed besides maybe extended vacations.

kyleaaa

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Re: Retirement strategies for indepdent workers
« Reply #11 on: February 02, 2014, 07:51:46 AM »
From what I read, I either do a SEP account or an IRA. Not both.

Incorrect. You can contribute to both at the same time. A traditional IRA takes employee contributions (i.e. you contribute). A SEP IRA takes EMPLOYER contributions (i.e. your employer contributes). It doesn't matter that for self-employed people, the employer and employee are the same thing. They are legally distinct for the purposes of contributing to requirement accounts. You can do both. I do.

A solo 401k is also a great option, although the administrative upkeep is slightly more. For that reason (and because I already have a decent 401k at my day job), I went with the SEP IRA. But I know a number of people with solo 401k plans at Vanguard and none of them have said anything to lead me to believe the paper work is THAT bad.

EDIT: One important caveat. At Vanguard, you can't invest in Admiral shares in a solo 401k, so if getting the absolute lowest expense ratio is important to you, a SEP IRA is your only choice with them. This cost disadvantage could turn out to be quite significant over 40 years of investing.
« Last Edit: February 02, 2014, 07:57:03 AM by kyleaaa »

AdrianC

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Re: Retirement strategies for indepdent workers
« Reply #12 on: February 06, 2014, 08:28:32 AM »
I just found this article:
http://www.obliviousinvestor.com/sep-vs-simple-vs-solo-401k/
There's a difference between a SEP/IRA vs a Simple IRA vs Solo 401k.

The Solo 401k sounds like the best option that has the greatest amount of yearly contributions...but it doesn't sound simple. I assume that everyone here does their own investing without any kind of paid advisor. Anyone here set up a Solo 401k on their own? What's the paperwork like?


Good information. I'm an independent too. Have had a SEP and an IRA for 10 years or so. The contribution limits between SEP and 401K have not affected me so far, but as I move towards RE (by cutting down my work hours) it looks like a 401K will be the way to go - higher contribution limits on less income.