Need some advice on retirement plans for the self-employed

[kms]

My wife and I have only just moved to the US less than two years ago, and we are both still a but overwhelmed when it comes to retirement plans so bear with me.

In short, our situation is as follows:

• We've just bought a house in Austin, TX, for $350,000 with a 20% downpayment. Since I'm all too familiar with APR math our goal is to pay it off as quickly as possible. Fixed monthly mortgage payment including escrow (property taxes are crazy in TX) is roughly $2,600.
• For obvious reasons I also need to contribute to some sort of retirement fund.
• Combined income before taxes: around US $175,000 ($60,000 wife + $115,000 me)
• We have $20,000 emergency money in our savings account and another 10,000 EUR in Germany. We don't need any more savings so whatever money we have at the end of the month we'll be throwing at the house.

Like I've said we've only just moved here less than two years ago from Europe, and have been contributing to Germany's pension fund back in Germany. In the US, we're starting from scratch. My wife has started contributing to her employer's 401k (Vanguard) with a 4% match as soon as she was eligible to, and her current paycheck deduction is 10%. I am currently not contributing anything yet, and this is why I'm here: what would you recommend for someone who is self-employed? Obviously there will be no employer match for me but I'm guessing a 401k (most likely Vanguard) would make most sense for now? Or should I prefer an SEP? Or both? Or maybe a Roth IRA? Or all three of them?

I'm a bit overwhelmed right now to be honest - there's too much choice.

[chasesfish]

Welcome and congratulations!   There's an overwhelming amount of options for sure!

How quick do you want to pace these changes in?  The biggest recommendation I have right now is increase your wife's contributions WAY up for November/December and help her get the full $18,000 into her 401k for the year.  You then have until you file your taxes in March/April to contribute to individual IRAs for the each of you for $5,500 each for the current tax year.

Long term, you'll also want to look into the various options for a self-employed individual, but if its all overwhelming, start with increasing her 401k to the maximum today.

[BTDretire]

My wife and I have only just moved to the US less than two years ago, and we are both still a but overwhelmed when it comes to retirement plans so bear with me.

In short, our situation is as follows:

• We've just bought a house in Austin, TX, for $350,000 with a 20% downpayment. Since I'm all too familiar with APR math our goal is to pay it off as quickly as possible. Fixed monthly mortgage payment including escrow (property taxes are crazy in TX) is roughly $2,600.

You need to crunch some numbers before you just say "our goal is to pay it off as quickly as possible".  It depends on your mortgage rate, can you deduct the interest? What are your investments paying?
  The idea of paying off your mortgage has a long thread of it's own with proponents on both sides.
 However, many of those that want to pay it off agree it is not necessarily the best financially, but it provides great peace of mind.
 You are probably in the 25% bracket, if you have a 4% mortgage and it's deductible, that makes the real cost 3%. If you put the money (say $10k) you would have used to payoff the mortgage into a tax deferred investment, that saves you 25% of $10k, or saves you $2,500 in taxes. Plus, that money will grow tax free at hopefully a greater rate than 3%.
  I'm sure others will have more opinions, but that is mine.
 We are self employed and use a SEP, I have often thought I should have opened a 401k, because of the greater amount that can be contributed. We are near starting to withdraw from our stache, so it is not worth it now.
 The tax deductions I use are HSA, SEP, deduct 1/2 of my SS payment, deduct my health insurance cost, and then the standard deduction. I suspect with your income a 401k would be better, especially if you are saving enough to put a large sum into it. Should be able to get down to the 15% tax bracket.
 You can put money both a SEP and an IRA in the same year, same with a 401k and an IRA, but there are income limits to those.
 Sorry to throw so much info at you, but with a little time and research it will become clear.[/list]

[EarthSurfer]

kms, Welcome to the US & MMM!

As chasesfish mentioned, maximizing your wife's 401K contribution is the first, easiest step.

If you are a sole proprietor or single person LLC as defined on Schedule C of your tax return, you should consider an Individual 401k (often called a "Solo 401K"). If you establish the plan this year, you can contribute $18,000 personal contribution (plus $6,000 catch-up if you are over 50 years old), and an "employer" contribution of effectively 18.3% of your Schedule C income. (The quoted 25% is adjusted for FICA withholding.) For 2017 the total possible contribution is $60,000 if your Schedule C income is high enough.

Bankrate.com has a great calculator for exploring options:
http://www.bankrate.com/calculators/retirement/self-employed-401-k-calculator.aspx

Both Fidelity and Vanguard have "template" 401K plans which you can set up easily in a day or two. Fidelity stepped me through filling out the plan paperwork. The plan documents can be overwhelming to read!

I was unable to find a template plan ("designed & conforming to IRS regulations") which allowed for penalty withdrawals earlier than age 59 1/2 at a low fee brokerage.

[kms]

Thanks for your answers so far. That is, indeed, a lot to process. Some additional facts to clarify:

Our mortgage APR is 4.25% and, well, not the greatest. Still beats paying rent though. Long story short the mortgage is in my wife's name only because as a self-employed individual I would have had to present tax returns for at least the last two years. Which I can't because we've only just moved here less than two years ago. Thus, the mortgage terms are based solely on my wife's income. Accordingly, we were only able to secure a 30-year fixed 4.25% APR mortgage. This is our first mortgage, we are filing jointly, and I am on the title. If I understand correctly it should thus be tax deductible. Our federal tax rate should be 28% based on our income, and Texas doesn't have a state income tax.

And when I say we want to pay off the house as quickly as possible I mean it, that part is not negotiable. One reasons is that we both hate debt. With a passion. Our student loans were paid off in no time, and we never had to finance anything ever before. Anything we ever bought was either paid in full at the time of purchase, or financed through a short-term loan with 0% APR. This is the first time that we went into debt voluntarily and we want to get out as quickly as possible. It's like a sword dangling above my head, and I hate the idea of owing someone that much money (which is also why we insisted on saving for the 20% downpayment first even though we could've gotten a similar rate with 10% or less). The other thing is that we don't know at this point yet how long we are going to stay in the US. It might well be forever, it might not. And there's only one thing even worse than debt: the bureaucracy associated with debt in a foreign country. If one day we decide to move back (or some place else, who knows. Australia seems like a nice place to be...) we might decide to keep the house, and I want to be debt-free when and if that happens.

And in regards to investments: they don't pay anything because we don't have any money invested anywhere save for the house that we have just bought. We've spent all our money traveling around the world last year, and only had a few thousand dollars left when we arrived in the US. I'm also not looking to invest in anything right now because, again, house first. Debt-free first.

And last but not least: I'm not looking to maximize my tax deductions or my retirement savings, and neither of us is looking for early retirement. What I am looking for right now is the best way to save around say 10% of my income as self-employed individual for retirement. For now. Once the house is paid off and we're debt-free I am definitely going to max out both our retirement plan savings but for the next 5-7 years we have absolutely no intention of doing so.

Sorry about the confusion, I should have said that in my initial post already.

[BTDretire]

We don't need any more savings

Blasphemy! OK, only joking, kinda!
I'm sure there are others that can make a better argument, but if you insist on paying off the mortgage it will cost you a lot of money.

And in regards to investments: they don't pay anything because we don't have any money invested anywhere save for the house that we have just bought.

I find the above a reason to save the money and not pay on the house.
 Part of the reason my federal tax bill was 0.8% ($872) instead of 15% ($16,200) is because I had savings to invest in an HSA, SEP, or in your case a 401k.
To say that another way, I have $15,328 instead of the IRS, and if the stock market is normal this $15,328 will turn into  $30,000 in ten years.
 I could make the case* for you with a maxed out HSA, ($5500) 401k ($18,000) and 2-IRAs, ($10,000) knocking $33,500 off your gross income. That could save you $7,000 to $8,000
on your tax bill. * assumes these deductions are all available to you. I forgot the mortgage deduction you will be losing as you down the mortgage, another $2,500.
  I've said enough and will let you be.
 Oh, and,

[kms]

I could make the case* for you with a maxed out HSA, ($5500) 401k ($18,000) and 2-IRAs, ($10,000) knocking $33,500 off your gross income. That could save you $7,000 to $8,000
on your tax bill. * assumes these deductions are all available to you. I forgot the mortgage deduction you will be losing as you down the mortgage, another $2,500.

I get what you're saying and I don't disagree that it would be lovely to knock off a couple of thousand dollars of our tax bill. I'll go back to my spreadsheets and do the math again to find that sweet spot between tax savings and paying off the house as quickly as possible.

In the meantime I'd like to get back to topic. Right now I don't yet qualify for an HSA since I don't have a high-deductible health plan but I will definitely look into that for 2017. I am also going to open a 401(k) in the coming week and start paying into it. How about the SEP, would that count towards my taxable income as well? I'm still a bit confused to be honest - what exactly is the difference between an IRA, a SEP, and a SEP IRA?

Oh, and thanks for the nice welcome :-)

[BTDretire]

SEP and SEP/IRA are the same, and yes you get to deduct the amount you contribute from your income, within the limits. For self employed only.
  IRA is a tax deductible contibution that most people can use. It has lower contribution limits than the SEP.

Can I Contribute to both my SEP IRA and Traditional IRA?
The government places no restrictions on contributing to both a SEP IRA and a Traditional IRA in the same year so you do not need to reduce your SEP IRA contribution to also contribute to a Traditional IRA. As you note, however, there are income limits to deducting contributions to a Traditional IRA.Apr 4, 2013
Can I Contribute to both my SEP IRA and Traditional IRA? - NerdWallet
https://www.nerdwallet.com/blog/investing/sep-ira-traditional-contribution-limits/

Can you contribute to a sep and 401k in the same year?
The answer is no, assuming that the 401k and SEP IRA are with two different companies not under common control. ... While the employee contribution limits to a 401k are per person, the employer contribution limits (including a SEP IRA for the self-employed) are per plan.Sep 5, 2017
SEP IRA and 401K | Can you contribute to both? - Doughroller.net
https://www.doughroller.net/.../sep-ira-for-the-part-time-self-employed-who-also-contrib...

[kms]

Thank you BTDretire, that was very helpful. Your second quote was a bit misleading by the way because the question the answer is referring to is not "Can you contribute to a sep and 401k in the same year?" but rather "Do your 401k contributions reduce the amount you can contribute to a SEP IRA?" That had me confused for a bit until I opened the article you were quoting this from ;-)

I can see a bit more clearly now. First, open a 401k for myself and contribute as much as I can or am willing to. Second, open a SEP IRA and do the same. Third, consider changing health plans in order to qualify for an HSA. Got it.

[BTDretire]

The healthcare plan really depends on how much healthcare you use.
 I have had a $10k deductible plan for many years, we have only spent  over $4k one time and
 that was when my son had his wisdom teeth surgically removed. We have been lucky. I'm 62 now and think I'll make it to medicare before I would want to lower my deductible. You also need to have cash availble to pay that deductible just in case.
  Sorry about my insertion of the wrong question, on the other hand, you are reading and planting the ideas, so you're on your way.
 If you open the 401k you may not need the SEP.
As I understand it there is more involved (and more rules) for a 401k, a SEP is simple to implement. But if you are going to save a large percentage of you income for retirement, than
a 401k would be helpful, if a smaller amount than a SEP is fine.
I don't no the rules for a 401k, but google does.
  I'm off to coffee with the guys.