Best Retirement account for self-employed family business

[kevbot]

My father owns a business that my wife and I have been running since May 2015. We weren't sure if we would be sticking around, so last year, we were 1099 employees, and will do the same for some or most of this year, and then transfer ownership next year. To add another layer to this onion, my wife has been working also, but she has started working part time at the local library also. She will be full time starting in July. She still will do some work, and I want to keep her "on staff" to help justify some expenses like cell phone and computer use being run through the business. In the future, we will like be the owners and likely register as a S-corporation (unless we get advised otherwise). In the future, we would like to build the business up enough to hire one part or full-time employee, but growths beyond that is not likely in the near future (if ever)

Because we can live on one income, and because we want to take advantage of tax savings, I would like to start either a SEP IRA, Simple IRA, or Solo 401(k). I'm not sure what will be best. In the future (fifteen ish years) we plan on retiring, and I'd do a Roth conversion ladder.

We are 22 currently. Business should net at least $30k this year and will likely be between $40-60. Does anyone have advice, or where could I go to find the best advice? We have an average accountant, but generally don't know anyone who's a tax professional that is knowledgable about every retirement.

[seattlecyclone]

I think a solo 401(k) will offer you the greatest potential for tax-deferred savings if it's just you working for the business. It lets you save something like $18k plus 25% of profits. I think things might get more complicated when you bring employees into the mix, as there are rules about making employer contributions equitable. I don't know the ins and outs of how this work between the different plan options.

[Vilgan]

solo 401k, and then there's a few potential approaches depending on income and desire to save.

A standard solo 401k (the free kind from Vanguard/Fidelity/others) will let you save 20% of net profit as profit sharing (pretax) and then another 18k per person as a pretax deferral. This 18k limit is shared across income sources tho, so she can't save 18k for her work here and then go save another 18k for her work as a librarian.

If at some point you want to get more into a tax sheltered state and have run out your other methods like Roth IRA, HSA, etc. then you can also explore making a custom 401k plan that allows after tax (not Roth) contributions to enable the mega backdoor roth. Relevant blog post here: http://thefinancebuff.com/after-tax-contributions-in-solo-401k.html

s-corp election can be really valuable once you are raking in the $$, but its not terribly relevant at the 60k level. Imo its something to look at once you have 6 figure net income from the business.

Fidelity can be very helpful with getting stuff set up, I'd recommend just giving them a call, explaining the situation, and having them walk you through setting up a solo 401k at some point. Once you are ready to invest, come back here or to bogleheads to get advice or just go read up on the 3 fund portfolio at bogleheads.

[Axecleaver]

Do not do a solo k in this scenario. It will prevent you from hiring employees later, because you will fail the Highly Compensated Employee test for the 401k. You and your wife are considered highly compensated because you're relations of the company owner. This plan only works when you do not have employees. Also be aware of all the filings you need to do for worker's compensation, state and federal unemployment, and (if applicable) liability insurance.

I'm going through this scenario myself - in the process of converting two of my employees from their W-2 employment through a staffing company to full time employees of my firm, and starting up a 401k for everyone. It's treated as a plan conversion, because the existing plan needs to change to accommodate new people, with all new rules and waiting periods. Kind of wish I had kept it as a SEP IRA, which is a lot cleaner.

For the dollars you're looking at, you could also consider a SIMPLE IRA which has lower limits, but at 60k net revenue you probably won't be hitting those for two people, anyway.

[Vilgan]

Do not do a solo k in this scenario. It will prevent you from hiring employees later, because you will fail the Highly Compensated Employee test for the 401k. You and your wife are considered highly compensated because you're relations of the company owner. This plan only works when you do not have employees. Also be aware of all the filings you need to do for worker's compensation, state and federal unemployment, and (if applicable) liability insurance.

Meh, worrying about this is a ways off. You can use a solo 401k for now, just mark 1 year service eligibility to participate and then worry about converting a plan some period after you actually have an employee hired. Of the things to worry about early on, HC testing that you don't need to worry about until a year after your first hire should not be one of them.