Tax refund thanks to Mustachianism!

[miranda622]

So my husband and I own a small marketing agency, and our CPA just completed our taxes (we'd taken the extension). I knew we'd done a lot to minimize taxes, but we weren't sure exactly what the damage would be... Very happy to find out we're actually getting around $6K total back from state and federal (though the state apparently has 2 months to give us the refund, seriously?).

The business had generated around $300K in total revenues in 2015, and $350K in 2016. We ended up paying almost $26K in federal tax and 10.3K in state last year; this year, we're only up for around $15K federal and $7800 state. Really excited to see so many of the strategies we've learned here (literally) pay off... Some of the biggest things were:

- Switch from individual IRAs (11K total limit) to 401ks (36K for the two of us, plus $1600 in "employer" match - we started midway through the year, will get a "true up" this year), as well as a SEP IRA, where we 'stached another $18,000 total. (Wasn't sure of legality here but our accountant confirmed it was OK, since we found a plan that didn't specify that you couldn't have another plan.) We have employees as well, who we matched funds for in the 401k up to 4%, but limited SEP eligibility to 3 years, which doesn't cover any of them.

- Prepay our family's self-employed health insurance premiums for the following year - an extra $9K

- Prepay first half of property tax - $3K

- Fully fund HSA account ($6750)

- Pay estimated state taxes by end of year ($8.5K), which were then deductible from federal

We also fully funded 2 Roth IRAs using the rollover method. Overall, we managed to add around $100K to our investment portfolio and pre-pay a bunch of expenses, which really helped as we had a pretty big drop in business last spring, which has fortunately turned around, but we're still not likely to match last year's earnings. We've realized our best strategy is to assume that next year will be a shitty one for business, and then be pleasantly surprised if we're wrong.

Anyway, just wanted to post as a thank you/success story -- MMM's blog and this forum was truly instrumental to helping us build a better strategy for tax optimization and saving.

[terran]

- Switch from individual IRAs (11K total limit) to 401ks (36K for the two of us, plus $1600 in "employer" match - we started midway through the year, will get a "true up" this year), as well as a SEP IRA, where we 'stached another $18,000 total. (Wasn't sure of legality here but our accountant confirmed it was OK, since we found a plan that didn't specify that you couldn't have another plan.) We have employees as well, who we matched funds for in the 401k up to 4%, but limited SEP eligibility to 3 years, which doesn't cover any of them.

This may be allowed by your particular record keeper, but there's no benefit. The employer contribution limits are shared between the 401k and the SEP, so you may as well get rid of the SEP and only use the 401k which as you have found has the option of employee salary deferral contributions as well as employer profit sharing contributions.

Also, you can contribute to an IRA and an employer plan, although you probably have too high an income to contribute directly to a roth IRA or to take a deduction for traditional IRA contributions, so you'll need to learn about the "backdoor roth IRA." Your existing tax deferred IRA balances (including the SEP) will cause problems here, so you'll want to look into whether your 401k can allow incoming rollovers from these IRAs.

[miranda622]

Yep, the 401k has the profit-sharing option, but that would have been open to our employees too, and since some of their salaries are as much as what we pay ourselves in salary, we would have needed to do a much higher match level there. We'll probably drop the SEP when we have employees who'd need to be eligible.

We did do the backdoor ROTH IRA, that's what I was referring to with the rollover. Worked out fine!