SEP-IRA advice desired

[TeaCake]

I opened an LLC this year as a sole proprietor, and wondered if anyone has advice about SEP-IRAs. I have not put away any money for retirement this year and am trying to figure out my best options for reducing my income on my tax return via retirement contributions. The SEP-IRA seems to be a good option, but my (maybe-need-to-be-fired) accountant had never haerd of it.  I'd like to put away as much as possible and get a tax advantage for it at the same time. Anyone know of pros/cons or have any tips? Thanks!

[Papa bear]

Posting to follow: looking to open a SEP-IRA as well. 

Called vanguard a few days ago and they have a team that handle these.  Seems fairly simple to set up, contribution limits are 20% of net income from the business, up to 53k annual, and can deposit up to your tax filing date (usually april 15).

I've got a big tax bill this year and hope I can save some $$'s.


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[terran]

You (both) may want to look into a Solo 401k instead. Remember that you're only eligible if all employees are either owners or their spouses. The advantage over a SEP is that you can contribute significantly more at lower incomes -- you can max out either when you hit around $265k, but below that the solo 401k wins out. Mess around with http://www.bankrate.com/calculators/retirement/self-employed-401-k-calculator.aspx to get a sense of it for your income level. This does assume that you're not already contributing to a 401k at another employer.

[johnny847]

With a SEP IRA, you can only contribute 25% of your net profits (less 1/2 FICA tax) up to some limit (I think it was 53k, as Papa bear said). This sucks.

I'd recommend a SIMPLE IRA if you currently make and forsee making less than $12.5k from this LLC. This is because the reporting requirements for a SIMPLE IRA are much simpler (haha) than that of a solo 401k.
With a SIMPLE IRA, you can contribute 100% of your first 12.5k in net profits (less 1/2 FICA tax)

However, a solo 401k lets you contribute 100% of yoru first 18k in net profits (less 1/2 FICA tax) as an employee, and 25% of your profit as an employer (less 1/2 FICA tax). (The SIMPLE IRA only lets you do 3% as an employer). So if you would max out a SIMPLE IRA, definitely do a solo 401k instead.

If you want a recommendation for the SIMPLE IRA, I opened one with Schwab and it's pretty good. No maintenance fees nor minimums. You can trade Schwab ETFs for free. They have a pretty good selection of index ETFs. I personally buy only SCHB in that account (tracks Dow Jones broad market index).
The one thing I don't like about it is you can't make contributions online. You either have to fax or mail in a form. Thankfully the contribution itself can be done via ACH, once you've linked the bank account.
I didn't go with Vanguard because they don't have admiral shares available in their SIMPLE IRA or 401k. the SCHB ETF has an ER of 0.03%, which is even lower than Vanguard's VTI (though it should be noted they track similar but not identical indices)!

[terran]

This is because the reporting requirements for a SIMPLE IRA are much simpler (haha) than that of a solo 401k.

Unless I'm mistaken these reporting requirements consist of filling out a single form once a year if the solo 401k contains more than $250,000.

[johnny847]

This is because the reporting requirements for a SIMPLE IRA are much simpler (haha) than that of a solo 401k.

Unless I'm mistaken these reporting requirements consist of filling out a single form once a year if the solo 401k contains more than $250,000.

Upon more searching I think you're right. I don't know why I thought the reporting requirements were more onerous.

I guess the decision of SIMPLE IRA vs solo 401k boils down to two things:
1) Does the OP make more than 12.5k
2) What are the fees and available funds associated with each SIMPLE IRA and solo 401k from reputable providers? Vanguard doesn't let you have admiral shares in their SIMPLE IRAs or 401k's and also charges a $20 fee for their accounts unless you hold at least $50k at Vanguard already. But at the same time, simplicity by keeping all your accounts at Vanguard is nice too.

[Rufus.T.Firefly]

I just set up my self-employed 401(k) through Fidelity. Customer service was very nice and the process wasn't too arduous. It pretty much involved printing off some forms and mailing them in. Three days later, I had an account automatically set up for me.

It appears that the fund offerings are identical for the 401(k) and the SEP IRA - that is, plenty of low-cost index funds.

[TeaCake]

Thanks for all the advice. I'm the OP. I have made well over than $12.5K this year in business (may 15 times as much). I have no employer-sponsored 401K and wasn't really thinking about this when I went out on my own. I need to learn more / be savvier about tax strategies. I'm good about saving but slow to invest, and that's why I'm starting to read this more. Thanks you all - I'll investigate the difference is between the Self Employed 401K vs. the SEP-IRA.

[Frugalman19]

I opened an LLC this year as a sole proprietor, and wondered if anyone has advice about SEP-IRAs. I have not put away any money for retirement this year and am trying to figure out my best options for reducing my income on my tax return via retirement contributions. The SEP-IRA seems to be a good option, but my (maybe-need-to-be-fired) accountant had never haerd of it.  I'd like to put away as much as possible and get a tax advantage for it at the same time. Anyone know of pros/cons or have any tips? Thanks!

Ive never heard of a tax preparer who doesnt know what a SEP-IRA is. Being a tax preparer, its scary to hear they are out there, its such a big tax tool that is used so often. I would seriously start looking for a new accountant ASAP before tax season starts and they cant fit you into their schedule.

[TeaCake]

I agree. The tax preparer is a friend who does it for free/barter (but is an actual full-time accountant), but I think I''m better off paying someone who can keep up with my growth. Now that I've read up on my options, it seems the Individual 401K is a great option for me. Anyone have any recommendations on which to choose?

[terran]

Like PowerBroker I'm happy with fidelity. They allow incoming rollovers which could be helpful if we ever make enough to need to do a backdoor roth, and they give access to a good set of low expense ratio funds (look for things labels spartan). My one complaint is that you can't do any kind of electronic transfer in so you're stuck mailing in contributions or I actually go in to the local fidelity office. Vanguard would be decent too, but as mentioned upthread they charge $20/fund/year if you don't have $50k invested (all funds at vanguard count though) and they don't give you access to admiral class funds (only the more expensive investor class). They do offer a roth option which some people like. http://whitecoatinvestor.com/where-to-open-your-solo-401k/ has a good summary of these and other options.

[Gin1984]

I agree. The tax preparer is a friend who does it for free/barter (but is an actual full-time accountant), but I think I''m better off paying someone who can keep up with my growth. Now that I've read up on my options, it seems the Individual 401K is a great option for me. Anyone have any recommendations on which to choose?

I used fidelity, and recommend it to some of my coaching clients who are self-employed.  I find it to be cheaper than vanguard, in the beginning.