Author Topic: self-employed, small income, options for the investment impaired  (Read 1902 times)

Double Yu

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We're a low-to-moderate income family (with some employment weirdness with DH working overseas and us taking the Foreign Earned Income Exclusion - in case this is relevant info) and I make some supplemental money through self employment (freelance editing, writing, etc).

I've only just discovered that it's possible to invest some of what I earn via SEP-401(k) or SEP-IRA and in trying to sort out my best option, I've read up on the forums, here:

https://forum.mrmoneymustache.com/investor-alley/i401k-for-self-employed-looking-for-recommendations/msg1773506/#msg1773506
https://forum.mrmoneymustache.com/investor-alley/solo401k-higher-fees-or-a-midcapsmall-cap-fund/
https://forum.mrmoneymustache.com/investor-alley/ira-for-the-self-employed/msg538664/#msg538664

and the Vanguard comparison site:

https://investor.vanguard.com/what-we-offer/small-business/compare-plans?Link=compareplans&LinkLocation=smallbusiness_overview


and am kinda at a loss as to where to start.

I have no 401(k) and a neglected IRA (Fidelity, ~$2,000) that could conceivably be rolled into a SEP-IRA (if warranted. seriously, I'm not kidding with the investment impaired description).

Also, if that's not bad enough, I'm 47 so that'll need to be taken into account...


To which can I contribute more?
To my eye it looks like I could contribute 100% of compensation to a 401(k).

Given our abysmal retirement savings/investments, I don't anticipate being in a high tax bracket later in life, so that can influence the tax-deferred status of the product I choose.

Thanks to anyone willing to weigh in.

Double Yu

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Re: self-employed, small income, options for the investment impaired
« Reply #1 on: January 16, 2018, 12:46:57 PM »
Sorry, in case it wasn't clear, I do have a question!

Given a choice between a 401(k) and an IRA and given the backstory mentioned above, is one or the other preferable as a place to start?

mintleaf

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Re: self-employed, small income, options for the investment impaired
« Reply #2 on: January 16, 2018, 04:20:24 PM »
It depends how much you're looking to contribute. Since you have self-employment income, you're eligible for a solo 401k, which effectively allows you to make tax-deferred contributions up to 18.5k + 20% of self-employment income. It's a bit of paperwork to set up, but not that bad.

The SEP IRA is supposedly a little less complicated to set up, but with lower contribution limits.

Telecaster

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Re: self-employed, small income, options for the investment impaired
« Reply #3 on: January 16, 2018, 05:18:52 PM »
Solo 401(k) is the way to go.  It isn't that much harder to set up, and the contribution limits are much higher. 

TomTX

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Re: self-employed, small income, options for the investment impaired
« Reply #4 on: January 16, 2018, 08:02:30 PM »
Sorry, in case it wasn't clear, I do have a question!

Given a choice between a 401(k) and an IRA and given the backstory mentioned above, is one or the other preferable as a place to start?

I would start with the IRA, because you can still make a $5,500 contribution for 2017.  Then you can have more time to figure out what else you want to do.

Double Yu

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Re: self-employed, small income, options for the investment impaired
« Reply #5 on: January 16, 2018, 09:28:57 PM »
Ah, I knew there was still time to contribute for 2017 but hadn't realized it was only for the IRA. That makes some sense, to just start that first, because yes, part of my impetus right now is to limit my 2017 taxes.

So my self employment income is under 10k per year, would that change any order of preference between the two? Also, if I can continue budget wrangling skillfully enough, I would aim in the direction of 50% or more of a contribution - again, does that tip the scale in favor of one over the other?

So far the plus of the IRA is 2017 tax benefit.

The plus of the 401k is possibility of greater contribution.

does factoring my spouse in make a difference either way?

TomTX

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Re: self-employed, small income, options for the investment impaired
« Reply #6 on: January 17, 2018, 08:18:28 AM »
Well, typically you and your spouse could each contribute $5,500 to separate 2017 IRAs. So, $11,000 together. If you like Fidelity, use Fidelity and get a low-cost, broad based stock index mutual fund or ETF  (I like VTI, but there are plenty of good options. I don't use Fidelity.)

And do it again in 2018.

That would take care of all of your self employment income, so that's what I would do.

If you're in the 12% bracket, a Roth probably makes more sense than Traditional (deductible) IRA.

Double Yu

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Re: self-employed, small income, options for the investment impaired
« Reply #7 on: January 17, 2018, 05:20:26 PM »
Thank you TomTx

Telecaster

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Re: self-employed, small income, options for the investment impaired
« Reply #8 on: January 18, 2018, 12:04:13 PM »
Ah, I knew there was still time to contribute for 2017 but hadn't realized it was only for the IRA. That makes some sense, to just start that first, because yes, part of my impetus right now is to limit my 2017 taxes.

So my self employment income is under 10k per year, would that change any order of preference between the two? Also, if I can continue budget wrangling skillfully enough, I would aim in the direction of 50% or more of a contribution - again, does that tip the scale in favor of one over the other?

So far the plus of the IRA is 2017 tax benefit.

The plus of the 401k is possibility of greater contribution.

does factoring my spouse in make a difference either way?

With a SEP-IRA, your contribution is limited to 25% of profits.  So you could only stuff away $2500 of that $10K.  (actually a bit less than that because of the way the IRS makes the calculation).  You and your spouse could of course put the whole amount in regular IRAs as TomTX suggests, and sounds like the better way to go in this situation.     

But with an SE 401K your contribution is limited $18,000 for 2017 and $18,500 for 2018.  So in theory you could put away 100% of your income (again, a hair less than 100%).  And if you earn more than $18.5K in 2018, you can contribute and additional 25% of income. 

So, I'd go ahead and fund your regular IRAs for 2017, and then open the SE 401K (might need a minimum amount to open it).  That way if 2018 works out well, it will be available to you next tax season.   You still fund both a personal IRA and a SE 401K, as well. 





 


Double Yu

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Re: self-employed, small income, options for the investment impaired
« Reply #9 on: January 19, 2018, 09:52:37 AM »
Ok, I find I'm hitting brick walls due to not really understanding what I'm talking about, making it hard to grok what anyone else is talking about :/

(not due to what you wrote, Telecaster, just the sum of everything)

Here's my basic understanding/confusion:

  • SEP-IRA is a category of IRA for self employed persons - is it possible to choose whether it's Traditional or Roth, or is it in a different class altogether?
  • There is also SIMPLE IRA (akin to Traditional, but different somehow?)
  • I can take advantage of the April deadline to fund an IRA for 2017 - but then what if I put funds in for 2018 between now and April? How do I correlate the amounts to specific years? Would it just be that any amount under/at the 2017 maximum automatically is considered a 2017 contribution? Additional funds then go toward 2018?
  • or perhaps at this point, instead of focusing on the IRA (once 2017 contributions are in) I turn my funds toward a 401k (BUT maybe only if I'm sure to have more to commit than just the IRA maximum?)

[li]Once I open a 401k, it's been pointed out that some companies (Vanguard) don't allow rollovers from the IRA - so I'd keep both accounts - is this advantageous or detrimental for a lower income family with next-to-no other investments?
[/li][/list]

Sorry for needing such basic help and that I can't reciprocate with investment helpfulness back at y'all.

Telecaster

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Re: self-employed, small income, options for the investment impaired
« Reply #10 on: January 19, 2018, 11:34:49 AM »
    Ok, I find I'm hitting brick walls due to not really understanding what I'm talking about, making it hard to grok what anyone else is talking about :/

    (not due to what you wrote, Telecaster, just the sum of everything)

    Here's my basic understanding/confusion:

    • SEP-IRA is a category of IRA for self employed persons - is it possible to choose whether it's Traditional or Roth, or is it in a different class altogether?
    • There is also SIMPLE IRA (akin to Traditional, but different somehow?)
    • I can take advantage of the April deadline to fund an IRA for 2017 - but then what if I put funds in for 2018 between now and April? How do I correlate the amounts to specific years? Would it just be that any amount under/at the 2017 maximum automatically is considered a 2017 contribution? Additional funds then go toward 2018?
    • or perhaps at this point, instead of focusing on the IRA (once 2017 contributions are in) I turn my funds toward a 401k (BUT maybe only if I'm sure to have more to commit than just the IRA maximum?)

    [li]Once I open a 401k, it's been pointed out that some companies (Vanguard) don't allow rollovers from the IRA - so I'd keep both accounts - is this advantageous or detrimental for a lower income family with next-to-no other investments?
    [/li][/list]

    Sorry for needing such basic help and that I can't reciprocate with investment helpfulness back at y'all.

    --As far as I know,  there is no SEP Roth IRA.

    --SIMPLE IRAs are designed for companies with multiple employees.  I suppose you could set one up for an individual, but there's no point.  Skip this option. 

    --You personally decide and keep track of which funds go to which years.   For example, if you write a contribution check for $9000, you can decide that $5500 of that amount is a 2017 contribution, and the rest is for 2018.  Or $4500 to both, or whatever you want within the rules.  Up to you.

    --401K vs. IRA for this year is kind of your call.  Sounds like you don't really have enough income to take advantage of the 401K.  I'd probably open one just in case, but probably won't matter a whole lot. 

    --Having both types of accounts open at the same time really doesn't matter.  The do basically the same thing, so there is no real downside to having both of them open at the same time. 

    --No worries! 

    Double Yu

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    Re: self-employed, small income, options for the investment impaired
    « Reply #11 on: January 23, 2018, 12:20:27 PM »
    I did it!

    I opened and funded a SEP IRA*. A new era has dawned :)

    thanks for the help folks, very much appreciated!

    * I also logged into Fidelity for the first time in ?? and did some housekeeping, incl activating the old IRA that was just sitting there and not taking advantage of recent years' market upswings - god I'm so dumb - and streamlined the process for contributing to said accounts.

    I know, better late than never.

    koshtra

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    Re: self-employed, small income, options for the investment impaired
    « Reply #12 on: January 24, 2018, 09:20:26 PM »
    Brava!

    Debonair

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    Re: self-employed, small income, options for the investment impaired
    « Reply #13 on: January 24, 2018, 10:15:22 PM »
    So I am not married but I also fall under Court in Earned Income Exclusion. Your Husbands savings can not be put into a tax advantaged account, but it can be put into a normal brokerage account. Most of my money sits in a Vanguard account in index funds.