SEP-IRA versus SOLO 401k

 

Learn what the best choice is for your retirement future if you are a single employee at your company or you are a small company considering whether an SEP-IRA or a SOLO 401k is your best choice

 

If you operate a small company or you are a single person owner–you may be deciding among a number of retirement plans to stash away money for your retirement years.  Trying to decide the best option can be a daunting task for those who are new at facing retirement options or have recently opened a business for the first  time.

 

In this discussion TheWealthIncreaser.com will present ways that you can make this sometimes grueling decision—less grueling and help put you on a path to enjoying your retirement  in the manner that you desire and provide you with more clarity so that anxiety will not play a role in your life as you build wealth for yourself and your family.

 

It is the desire of TheWealthIncreaser.com that you will use this page as a guide so that you can experience joy on the inside that will lead to your retirement portfolio and your conscience experiencing a smoother ride!

 

Retirement Plan Options:

 

Depending on your line of work there could be many retirement options available to you.

 

Some of the more common include IRA’s (many versions), 401k’s, 403b’s, SIMPLE IRA Plans (Savings Incentive Match Plans for Employees), SEP Plans (Simplified Employee Pension), SARSEP Plans (Salary Reduction Simplified Employee Pension), Payroll Deduction IRAs, Thrift Plans, RRB Plan (Railroad retirement Benefits Plan), Traditional Pension such as Defined Benefit Plans, Money Purchase Plans, ESOPs (Employee Stock Ownership Plans), Government Plans, 457 Plans, 409A Non-qualified Deferred Compensation Plans and other profit sharing options.

 

If you desire a more in-depth understanding of the various retirement types or you feel that a SEP-IRA or a SOLO 401k is not right for you—consider going to the following links to learn more about the retirement account that may be a better choice for you.

 

https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans-1

http://www.realty-1-strategic-advisors.com/retirement-and-personal finance

 

If you are a small operator, depending on your yearly income—you could be choosing among a number of options but in the end the choice of which “Retirement Plan Option” is best for most and possibly you as well—normally comes down to the choice between an SEP-IRA versus SOLO 401k as they both allow you to maximize your contribution limits and control your investment options better than other plans.

 

However, as a practical matter it is important that you look at and  appropriately analyze all options available to you and not just base your decision on how you feel or think or based on what others are doing.

 

You must analyze all retirement options to see where you will benefit most from a revenue, savings, tax and goal oriented perspective.  After thorough analysis (and possible professional advice) you can select a retirement vehicle that serves your future goals and allow you to maximize your savings and tax advantages on an annual basis.

 

SEP-IRA

 

A SEP-IRA allows you to make contributions that are capped at 25% of your income after a reduction for self-employment taxes.  A SEP-IRA is used by those who have a small firm and solo entrepreneurs as well.

 

SEP IRA contributions for sole proprietors, on the other hand, are limited to 20% of your net self-employment income (business income minus half of your self-employment tax), up to a maximum contribution of $54,000 for 2017.

 

SEP Contribution Limits (including grandfathered SARSEPs) controls what an employer can contribute to an employee’s SEPIRA.  The amount cannot exceed the lesser of 25% of the employee’s compensation, or $53,000 (for 2015 and 2016, $54,000 for 2017).

 

Example: Lets say you are 52 years old and earned $60,000 in income after receiving your w-2 from your Limited Liability Corporation business in 2017.

 

Your total contributions would be capped at $15,000 for 2017!  

 

If you earned $144,000 your contributions would be capped at $36,000.

 

If you earned the maximum income for the year $270,000, your contributions to the SEP-IRA would be capped at $54,000.   The reason being that you have exceeded the contribution limit.

 

Can I make catch-up contributions to my SEP-IRA?

 

Because SEP IRA’s are funded by employer contributions only, catch up contributions  usually don’t apply because you as an owner (employer) would be making the contributions.

 

Catch-up contributions apply only to employee elective deferrals.

 

However, if you are permitted to make traditional IRA contributions to your SEP-IRA account, you may be able to make catch-up IRA contributions.

 

Compensation doesn’t include amounts deferred under a Section 125 cafeteria plan.

 

Compensation is limited to $270,000 in 2017 and $265,000 in 2015 and 2016.

  

SOLO 401k

 

A SOLO 401k allows you to stash away up to $18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over.

 

In addition, you can also use SOLO 401k’s to make ROTH 401k deferrals of after-tax money that you can withdraw tax free during your retirement years.

 

Solo 401(k), (also known as a Self Employed 401(k) or Individual 401(k)), is a 401(k) qualified retirement plan that was designed specifically for employers with no full-time employees other than the business owner(s) and their spouse(s).

 

A one-participant 401k also goes by other names, such as solo-k, Uni-k, one participant k and possibly other names as well as they are becoming more popular.

 

Although unknown by many in the general public a one-participant 401(k) has been around for a while (early 2000’s) and is basically a plan covering a business owner with no employees or just their spouse–and have the same rules and requirements of any 401(k) plan!

 

Contribution limits in a one-participant 401(k) plan

 

In a SOLO 401(k) plan the business owner (you) are both employee and employer.

 

You must always realize that contributions can be made to the plan in both capacities and you as the owner can contribute both:

 

  • Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit of $18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over; plus

 

  • Employer non-elective contributions up to 25% of compensation as defined by the plan

 

For self-employed individuals:

 

Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $54,000 (for 2017; $53,000 for 2016)

 

Example: Lets say you are 52 years old and earned $60,000 in W-2 wages from your S Corporation in 2017.  You deferred $18,000 in regular elective deferrals plus $6,000 in catch-up contributions to the 401(k) plan.

 

Your business contributed 25% of your compensation to the plan, $15,000.

 

The total contributions to your plan for 2017  that would be allowed is $39,000 with your maximum contribution for the year being $60,000 “if” you earned $144,000 in 2017 ($144,000 * .25 plus $24,000).

 

This would be  the maximum that you could contribute to the plan for Tax Year 2017.

 

If you had income from other sources and you participated in another 401(k) plan–your deductions would not be allowed and you would have to take corrective action.  By reading this discussion you now know that your limits on elective deferrals are by person, not by plan–meaning once you reach the limit–that’s it!

 

In essence, you must consider “the limit” for “all elective deferrals that you makes during a year”–regardless of source to ensure that you don’t exceed the limits and have to take corrective action–that could get costly!

 

Contribution limits for self-employed individuals

 

You must make a special computation to figure the maximum amount of  non elective (25% of your earned income) and elective ($18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over) contributions that you can make for yourself.

 

When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

 

  • one-half of your self-employment tax, and

 

  • contributions for yourself.

 

Testing in a one-participant 401(k) plan

 

A business owner with no common-law employees doesn’t need to perform nondiscrimination testing for the plan, since there are no employees who could have received disparate benefits.

 

The no-testing advantage vanishes if the employer hires employees. No matter what the 401(k) plan is called by a plan provider, it must meet the rules of the Internal Revenue Code.

 

If you hire employees and they meet the plan eligibility requirements, you “must include them in the plan” and their elective deferrals will be subject to nondiscrimination testing (unless the 401(k) plan is a safe harbor plan or other plan exempt from testing).

 

A one-participant 401(k) plan is generally required to file an annual report on Form 5500-SF if it has $250,000 or more in assets at the end of the year.

 

If you are a one-participant plan with fewer assets you may be exempt from the annual filing requirement.

 

Alternatives to a one-participant SOLO 401(k) plan and SEP-IRA

 

Other possible plans for a single business owner that might work for you depending on your business revenue and future goals include:

 

SEP

IRA

ROTH IRA

 

Conclusion

 

With a SOLO 401k you could contribute up to $54,000 for 2017 with a $6,000 catch-up provision if you are over age 50 (maximum contribution $60,000).

If you desire to establish a SOLO 401k you can go to: http://www.kiplinger.com/article/retirement/T001-C001-S003-set-up-a-solo-401k-with-low-fees.html

 

If you had annual income of $250,000 with a SEP-IRA you could contribute up to $54,000 for 2017.

If you desire to establish a SEP IRA you can go to: https://www.irs.gov/retirement-plans/establishing-a-sep

 

Be sure to consider other factors as well such as your years in business, when you plan to exit, tax ramifications now–and in your future, setup fees and administration fees, your anticipated future income, company growth and other factors that may be unique to you or the business that you operate.

 

You can choose to use an SEP IRA or SOLO IRA  if you are a sole proprietor, LLC or Limited Liability Company, S Corporation and possibly other legal structures that meet the IRS guidelines.

 

As you might expect the SEP IRA was once cheaper to set up and administer, however  that has now changed as many brokerage companies offer low cost SOLO-IRA setup and administering.  In addition, you must look at more than just  setup costs and the administrative fees as those are just a small piece in the overall puzzle toward your retirement goals.

 

Always keep in mind that SEP IRA contributions for sole proprietors, on the other hand, are limited to 20% of your net self-employment income (business income minus half of your self-employment tax), up to a maximum contribution of $54,000 for 2017.

 

You may have more investment choices with a SEP IRA as opposed to a SOLO 401k.

 

With a SOLO 401k you have the 25% employer contribution amount (non-elective deferral) based on your income minus the self-employment taxes–plus the elective deferrals and catch-up provision that would allow you to save more annually than a SEP IRA generally–depending on your income.

 

With both plans you would have to pay taxes on withdrawals, however at that time you might be in a lower tax bracket.  Both plans allow you to use the power of compounding to help you reach your retirement number.

 

Early withdrawals or tapping into  the account by you will result in serious tax penalties and vary depending on your age, years of contributions and whether an exception may apply.

 

Investments and Withdrawals basically follow the same guidelines that the IRS has set for IRA’s and 401k’s in general!

 

If you know that you will come out of the gate making $150,000 the decision as to the best choice will be much clearer for you.  However, if you come out of the gates slow and steady with your income increasing steadily from a low amount such as $20,000 in year one–$40,000 in year two and a steady upward trend an IRA SEP may serve your best interests during your early years.

 

In the end “proper analysis” and not just going on what you hear or see others doing –or what you feel will work is the real key.  It is the hope of TheWealthIncreaser.com that this discussion has at least provided you a starting point toward making your retirement dreams come true.

 

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25% of compensation as defined by the plan

Homeowner Tax Breaks & Strategies

Learn how you can save on your personal taxes by using the tax codes and strategic maneuvering…

 

In the current economy it is important that you use the personal income tax laws to your best advantage.  With the tax season roughly at the mid-point and the home buying season just months away TheWealthIncreaser.com thought that Homeowner Tax Breaks & Strategies was an appropriate topic to focus on at this time.

 

In the following paragraphs you will learn what you can do to lighten your tax burden and possibly achieve your goals in a timely manner if you are now a homeowner or you anticipate becoming a homeowner in the future!

 

If you are like most—focusing on your taxes is not a pleasant experience.

 

However, by focusing on and comprehending what lies ahead in your tax future you can possibly put yourself in position to experience more pleasurable moments in your and your family’s future. 

 

Be sure to choose among the following strategies (if you see the benefit of doing so) and lighten your tax burden and achieve your future goals in a more efficient manner.

 

It is important that you find an approach to effectively manage your personal taxes in the current economy that works for you and it is important that you have some ideas—and knowledge about how you can lighten your tax burden that will move you toward your future goals in a more efficient manner.

 

Be sure to retain and utilize what you feel can help you achieve your dreams in a timely manner and run what you feel might work for you by your tax professional to see if any of the following tax strategies can benefit you and your family.

 

OK enough fluff—be sure to analyze how you can utilize the following strategies if you are now a homeowner—or you intend on being a homeowner in the future:

 

  • Mortgage Related Tax Breaks

You can deduct mortgage interest, points, PMI/MIP  (a reduction in MIP of $500 for the average homeowner was expected this year in the United States but was abruptly cancelled with the change of Administrations) and your property taxes while you are a homeowner and have a mortgage and possibly property taxes even if you are not a mortgage holder.

 

You must itemize your taxes in order to claim the deductions and by doing so you will save in taxes on your federal and state returns.  In some cases it may be to your benefit to itemize on your federal tax return even though you will get less back on your federal return by doing so.

 

The reason for doing so would be that you would get more on your state tax refund but less on your federal—but your overall total (overall tax refund of state and federal) would be more by itemizing.  Many taxpayers take the quick way out and lose financially by not doing this analysis, thereby overlooking this potential option when it could possibly be to their benefit.

 

For example, if you will get $500 back on your federal taxes using the “standard deduction” as opposed to “itemizing” and $400 back in refund on your state tax refund using the “standard deduction” —your grand total is $900.

 

If you will get only $300 back on your federal taxes using the “itemized deduction” as opposed to utilizing the “standard deduction” and $800 back in refund on your state tax refund by itemizing—your grand total is $1,100.

 

Simple math tells you that you are better off electing to itemize—$1,100 minus $900 equals $200 more dollars in your pocket!  It can be difficult to determine in many cases without actually “running the numbers” as state tax laws vary and all tax returns are unique.   However “electing to itemize” might be something that applies to your situation and their could be potential advantages (primarily more cash in your pocket) for you.

 

  • Improvements in your Home (Targeted)

By purchasing solar panels, dual-paned windows, low flow plumbing, tank-less water heaters, and other energy improvements spelled out in the tax code you can possibly deduct them on your taxes if you itemize your deductions on form 1040.

Many home improvement energy related deductions are scheduled to expire in 2020 and who knows what will happen after that time.  However, at this time you can get a tax credit (applied directly against your taxes) of varying amounts up until the 2020 tax filing season.

 

  • Tax Exclusion from the Sale of Your Personal Residence

Did you know that you can possibly exclude the sale of your personal residence from taxes if you utilized your home as your primary residence in 2 of the 5 previous years?  If you are single you can exclude up to $250,000 of the gain and if filing as married filing jointly—$500,000 of the gain from the sale.

 

Therefore, if you purchase right—get a substantial appreciation in the price of your home and you decide that the time is right to move in a few years or so after the value of your home has appreciated—you could pocket a nice tax-free gain (be sure to run your plans by your tax advisor to ensure that you qualify).

 

The creator of TheWealthIncreaser.com has utilized this approach personally and with many past clients and there is some risk that is involved.  However, if you are of the personality type that doesn’t mind moving frequently, or you plan on moving frequently for other purposes—this could be a great strategy that could work for you.

 

Be sure to purchase in a neighborhood that has an upward trend in home appreciation.  Be sure that you know the risks and you have a properly funded emergency fund in place and little or no revolving debt so that you can reduce the risks involved for you and your family.  Even so, there is no guarantee that after your home purchase—the value of your home will appreciate.  Hopefully, you get the point and you can clearly see the potential of how you could actually use this strategy to build wealth.

 

  • Cancellation of Debt

Although not a pleasant use of the tax code or even an effective strategy for most (you probably lost your home) the “cancellation of debt provision in the tax code for mortgages” does lighten the sting of losing your home some as it could be even worse.  If you are one who can use the 2007 Mortgage Debt Forgiveness Act to reduce or eliminate your tax burden—you must do so.

 

The 2007 Mortgage Debt Forgiveness Act was extended through the 2016 tax year, however future extensions are uncertain at the time of this post.   If your mortgage debt was cancelled and the 2007 Mortgage Debt Forgiveness Act applies to your debt forgiveness you could legally avoid paying tax on the debt that was forgiven.  Time limits apply for using this strategy so be sure you fall within the timeline of the act to take advantage of this strategy if you have received or anticipate receiving mortgage debt forgiveness in your future.

 

  • Homeowner Exemptions at the Local, County & State Levels

Did you know that many jurisdictions offer various “homeowner exemptions” that have the real effect of reducing or possibly eliminating your real estate taxes?

 

The exemptions vary from state to state—county to county—and in many cases city to city.  However, they are available and it is your responsibility to search them out in your area and take full advantage of them.

 

Basic Homeowner Exemptions, Age Homeowner Exemptions, Military Homeowner Exemptions and many others are available.  Again it is up to you to find and enroll in them as they are in many cases—not highly advertised.  Most have filing deadlines, so immediately after your home purchase be sure to inquire.  If you used a real estate agent in the purchase of your home, your agent should be aware of the filing procedure in your area.

 

Conclusion

 

Be sure you are aware of what you can deduct or utilize in other ways (tax strategies) at the local, county, state and federal level.  Be sure to take advantage of all homeowner exemptions that are allowed in your jurisdiction that you are entitled to.  All of the strategies or options discussed in this post require that you own your property as an owner (personal residence) and the strategies are not designed for rental or other non-owner occupied properties.

 

You must always realize that you have a unique tax filing position and what may be effective and work for someone else may not work for you!

 

For example, if your AGI (Adjusted Gross Income) is $70,000 and someone else’s AGI is $40,000 and you go out and purchase $20,000 worth of solar panels and the person with $40,000 AGI does the same—you may be in position to utilize the credit either partially or in full, while the person with $40,000 of income might not be able to utilize the credit at all.

 

This type of scenario can play out in many areas of the tax code—therefore effective planning with experienced tax professionals may be to your advantage. 

 

Your income, family size, deductions, exemptions, education expenses, number of jobs, tax with-holdings, tax payments etcetera are uniquely your own—therefore effective analysis must be performed.

 

Be sure to put into action your new found knowledge about the Homeowner Tax Breaks & Strategies that you can possibly take—or make to ensure a more prosperous and productive future for yourself and your family.

 

As you move forward be sure to make a sincere effort to give it your best at all times and it is the desire of TheWealthIncreaser.com that this page has played some small part in empowering you to look at your tax situation in a more critical manner whether you are now a homeowner or you anticipate becoming one in the future.

 

It is important that you proactively look at your tax situation (you must get out in front of your taxes) and not look back “for answers” after you have encountered a difficult situation.  If you do not take the initiative to proactively attack your tax situation or any other area of your finances–you are making life on earth much more difficult than it should be for yourself and your family.

 

Don’t be afraid to get planning advice on the front end (even if you have to pay as it can be money well spent) as most planners (or those who operate at the top of their profession) are aware of strategies that you may not be aware of.

 

It is the hope of  TheWealthIncreaser.com that this page has sparked something within you to make you look at your taxes and finances in a different way, so that you can start on a serious path to achieving your dreams—starting today!

 

All the best…

 

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Learn about more “Tax Moves” that you can make…

 

Learn more about the Tax Benefits of Homeownership… 

 

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