Need retirement plan advice for self employed

[wincrasher]

Need some advice on setting up retirement plans for the self employed.

Can a SEP-IRA and a Solo 401k be stacked (as in, do both of them?)

And can you do a Roth as well?

After all my business deductions, my income is just shy of $200k.

[MonkeyMama]

You can put 20% into a SEP, which I would recommend. This year the max is $245k income x 20%, or $49k.

If your net income is $200k, you can essentially put in about $40k. The SEP is by far the easiest/best way to do this.

I am not 100% sure, but I think you can put in more with a solo 401k (get up to the $49k max, with the 401k contributions). The downside is this adds a huge layer of complication. Plenty of companies will do it for cheap, but doesn't mean it is done right. I would have to get some significant tax advantage, to consider that.

Where do ROTHs fit into this? You can do a ROTH, too. I don't know how ROTHs play into the $49k limits. Most people in that situation (any I have come across) make too much income to contribute to a ROTH. Just not anything I have ever pondered or come across.

One caveat - having employees makes thing far more difficult. I am presuming you don't have any.

[wincrasher]

You are right - have no employees. I have an LLC, so all the net income hits my 1040.

I've read the IRS publication, but it's very confusing. They don't call out the solo 401k specifically. And of course, it seems contradictory - seems like everything is subject to $49k limit, but in other places they are separate.

Also, it says you have up until your tax filing (including extentions) so you conceivably have until Oct 15 to set up 2009.

[jpg7n16]

Well you need the 401k part to get to the max 49k. But you could get 9,000 more deferred with the 401k as opposed to a SEP.

Roth's are allowed no matter which retirement plan you have, but they are not allowed for a single filer with a modified AGI over $105k, or married over $177k.

If you use either plan and are single, you won't be able to qualify for a ROTH. If you are married and use the max on either plan, it may push your AGI down far enough so that you could qualify for the ROTH.

[jpg7n16]

Oh and here is a link to a pdf file of the IRS description of the Solo 401k. Hope this helps!

http://www.irs.gov/pub/irs-tege/forum08_401k.pdf

And here are other retirment plans for small businesses:

http://www.irs.gov/pub/irs-pdf/p560.pdf

[MonkeyMama]

You are right - have no employees. I have an LLC, so all the net income hits my 1040.

I've read the IRS publication, but it's very confusing. They don't call out the solo 401k specifically. And of course, it seems contradictory - seems like everything is subject to $49k limit, but in other places they are separate.

Also, it says you have up until your tax filing (including extentions) so you conceivably have until Oct 15 to set up 2009.

The $49k limit applies to SEPs and 401ks, and other types of "defined contribution retirement plans." (You could not put in more than $49k, all your SEPs and 401ks combined).

I think it's pretty safe to say you wouldn't qualify for a ROTH.

Good point on the October 15th due date. If you extend, yes, you have until October 15th to fund the amounts. If you do a solo 401k plan, you have to establish it in the year you intend to contribute (it is too late to establish a solo 401k plan for 2009 contributions).

SEPs can be open and funded by your tax due date. So you can do a SEP for 2009, still.

Actually, if you are incorporated, I believe the SEP contribution is 25% of salary. If you don't take a salary and it all gets reported on your 1040, you are probably stuck with the 20% rule. (20% of profits).

[jpg7n16]

The $49k limit applies to SEPs and 401ks, and other types of "defined contribution retirement plans." (You could not put in more than $49k, all your SEPs and 401ks combined).

I think it's pretty safe to say you wouldn't qualify for a ROTH.

Well he might. If he uses a SEP, and contributes the max for himself (20% * 200,000 = 40,000) Then his AGI would only be 160k, which qualifies if he's married filing jointly.

Or the profit sharing (20%*200,000 + 9,000 employee deferral = 49,000; AGI = 151,000)

I think that lets you qualify for the ROTH. Cause salary deferrals don't count towards your ROTH limit right?

[wincrasher]

what is the "employee deferral"?

I don't pay myself a salary, so the profits just go to my 1040.

Another option is to not take some of my business deductions, thus boosting my income. Would have to run the numbers to see if that would be worth it. My gross before deductions is closer to $300k.

[jpg7n16]

"Employee deferral" is the deemed contributions from yourself as an employee of yourself.

At the http://www.irs.gov/pub/irs-tege/forum08_401k.pdf link I provided. The paragraph that starts at the bottom of page 3 says this:

Another question that we often hear is how salary deferrals are made when a person is self-employed or involved in a partnership. The person doesn’t usually know for certain what their income will be until the end of the year, or later. The final 401(k) regulations address this issue. The regulations state that a partner’s or self-employed person’s income is deemed available to them on the last day of their taxable year. And since an employee must have a deferral election in place before compensation is available, a self-employed person may not make a cash or deferred election with respect to compensation for a partnership or sole proprietorship taxable year after the last day of that year. If a partnership provides for cash advance payments paid to the partner during the taxable year that is based on the value of the partner’s services prior to the date of payment (and which do not exceed a reasonable estimate of the partner’s earned income for the taxable year), the individual can defer a portion of these advances even though their final compensation has not yet been determined. Obviously, if the self-employed person wants to maximize their contribution, they can’t do so until
their final compensation has been determined. That is o.k. as long as the election was in place as of the last day of the taxable year. Bottom line, self-employed participants may defer against “advances” or “draws.”

And earlier on it tells you that this amount may be considered on top of the employer contributions:

Only the employer contributions are limited to less than or equal to 25% of the employees’ compensation. The employee deferrals can be made in addition to the employer contributions.

The total of both is still limited to the $49,000. And yes it says 25%, but that is subject to a reduction for self-employed earnings making it .25/(1+.25) = .20 = 20%. So you could (as your employer of yourself) make an empolyer contribution of the 20%, and then defer (as the employee of yourself) because of the 49k limitation, up to $9,000.

But as always, you should probably consult with your tax professional to make sure that you are within limits from all of your plans.