Start SEP IRA or pay way fewer taxes? All other tax-free accounts maxed

[Fru-Gal]

Reading voraciously on MMM, I got excited about SEP IRAs and solo 401(k)s. Of course, it's too late to do the solo 401(k) as it has to be set up by December 31. Plus there are annual costs and admin headaches. Alternative is a SEP IRA for my small amount of schedule C income from a very longstanding business that I made less money at last year because I also now have a W2 job (thanks to the success of that business). I started to run the numbers.

If I *don't* deduct most of my business expenses, so that I show enough of a profit, I can save 20% of that profit in a SEP IRA. But then I have to pay thousands more in taxes just for that privilege. So it's better to just save the tax bill by paying taxes on a much smaller profit or net operating loss (again, depends on how many business expenses I decide to deduct -- all legit of course). Right?

I suppose I could set up the solo 401(k) for next year. Then would the tax savings make sense? Are these kinds of accounts more for when you are making a lot of money (maybe optimally around the max amount you can save in retirement accounts)?

Note, am also maxing out 401(k) with match in my W2 job, plus traditional IRA and after-tax savings.

[Watchmaker]

I suppose I could set up the solo 401(k) for next year. Then would the tax savings make sense? Are these kinds of accounts more for when you are making a lot of money (maybe optimally around the max amount you can save in retirement accounts)?

Note, am also maxing out 401(k) with match in my W2 job, plus traditional IRA and after-tax savings.

The tax savings should make sense with a solo 401k, because you'll be able to contribute up to $19,000 in employee deferrals plus some additional employer contributions (depending how much you made). Because the deferral limit for the individual 401k isn't set up as a percent of compensation, it works well for small businesses.

My SO uses an individual 401k for her small business.

[terran]

I think I follow what you're asking. If I'm understanding correctly, then it always makes sense to realize as many legitimate business expenses as you can. Any expense you deduct will mean you don't owe self employment tax or income tax on that amount. The only advantage of not realizing the expense is that you could put 20% of the expense in your SEP, which would avoid some tax drag while it's invested, but it would take quite a lot of time for that to be worth more than avoiding FICA and avoiding tax on the withdrawal.

Side note: there are a number of solo 401(k) providers that don't charge a fee.

[Fru-Gal]

Fantastic, thanks! Will look into no-cost 401(k) options.

[Watchmaker]

My SO uses Vanguard for her solo 401 k (they call it an individual 401k) and she finds it acceptable. The interface for the 401k is not as good as Vanguard's individual investor portal (which some people don't like either).