sep ira Archives - Lazy Man and Money

Solo 401ks and SEP-IRAs: Which Wins for Me?

June 22, 2010 by Lazy Man 3 Comments

Last year, I decided that it was time to get involved in a SEP-IRA. It only took about two years since my friend at RateLadder suggested the advantages of SEP-IRAs. It’s not so much that I was procrastinating, but that I needed my self-employment income to, well, buy stuff I needed.

While I knew about Solo 401ks, for some reason, I didn’t investigate them in detail. I think I perceived them as more difficult to get going. The other day I thought it might be time to revisit that situation. Here’s what I found.

About the Solo 401k

The Solo 401k is pretty much what you might expect… a 401K for self-employed individuals. In fact it’s often called an individual 401k. The idea is that you get the advantages of a 401k plan that regular employees do. Of course it’s not a pre-tax deduction do to the self-employment aspect of it (how would you withhold from a paycheck).

Why the Solo 401K seems right for me…

It all comes down to maximizing my tax deferrals. In 2010, the Solo 401K allows you to defer up to $16,500, plus 25% of my profits. The math is a little confusing and enough to make my head spin. So I’m going to link you to my friend Madison at MyDollarPlan’s analysis of Solo 401k Versus SEP-IRA. You’ll note that the Solo 401K allows for one to defer more money – significantly more money.

In theory one could defer $65,500 with the Solo 401k. However, I don’t make nearly enough money to make that happen. I’m hoping for a situation where I’m allowed to defer about $20,000. If I had to take a guess, I think that’s about where I would end up. At age 65 (31 years from now), that money should come in quite handy.

[Note: I’m not a tax guru, so these are mroe free-form thoughts. I will seek the advice of my tax advisor.]

Retirement Accounts Funded (and Personal Finance Links)

April 19, 2010 by Lazy Man 1 Comment

Slipping in just before the tax deadline, I was able to squirrel away close to $19,000 in various retirement accounts. Because almost all my income was 1099 last year, a good portion of it was via a SEP-IRA. The rest of it was via Roth IRA.

Now it’s time to start investing that. I’ve decided that I’m going to focus on PowerShares DB Agriculture Fund (NYSE:DBA). I consider that ETF a way to broadly track quite a few commodities – something that most people have limited exposure to. The rest of the money will likely be split into my old standby ETFs – VTI and VEU. I’m contemplating adding some bonds (via symbol BND), but I’m still thinking that at age 34 I want to be very aggressive.

With that said, here is some good reading to keep you busy for awhile.

The Money Writers:

Brip Blap writes on recurrent greed.
Digerati Life posts wipe away debt problems with debt snowflakes.
Frugal Dad blogs your coupons are making you poor.
Generation X Finance says don’t treat your 401(k) like a savings account.
Million Dollar Journey discusses the secret world of private banking.
Money Smart Life shares how not to miss a connecting airline flight.
My Dollar Plan asks can you have a 401k and an IRA at the same time?
The Sun’s Financial Diary gives 10 ways to save money and Earth.

Top PF Posts:

Free Money Finance presents retirement lessons: sail away into the sunset years.
The Real Estate Bloggers ask was Andrew Cuomo responsible for the mortgage crisis?
The Trend Rida wonders if Google will be a major player in mobile computing?
Uncommon Cents on borrowing from Mmyself.
A Penny Save writes avoiding spending temptation.
Saving to Invest posts good debt vs. bad debt – taking charge of your finances.
Get Rich Slowly shares a reader story: I was drowning in debt.
The Smarter Wallet posts how to get out of debt in four easy steps.
Wise Bread talks about the Work Exchange way to see the world.

SEP IRA: Self-Employed Retirement Plans

December 14, 2011 by Lazy Man 7 Comments

Are you self-employed and looking to retire someday? I am. Since this website brings in a little income, it qualifies as a small business. Additionally, I contract for some other companies, which also counts as small business income. The life of a contractor is often one without a 401k. Despite my Devil’s Advocate post of throw away your 401k, having the option for automatic savings is great when you are as Lazy as I am. Well I’m not going to sit around crying about lacking a 401k plan. Instead it’s time to alternatives. There are a few of them out there (and I expect to cover them in the coming weeks), but today I’d like to start with Self-Employed Retirement Plans: SEP IRA.

Before I start, I should give a few caveats. I’m not a tax-advisor. I’m not even a financial planner. This is just one person’s opinion based on some research. If you have knowledge in this area and I’m off, please let me know. In the upcoming weeks, I’ll talk with my tax advisor about what do for real. My theory is that it can’t hurt to come in prepared. If I know the pros and cons of each plan, the meeting will go that much quicker.

SEP IRA: Self-Employed Retirement Plan Benefits and Basics

In looking at retirement programs, I found 5 areas that I should focus on:

Contributions are tax-deductible – My tax rate this upcoming year with the full-time consulting looks to be fairly high. I can avoid that high rate now and take a chance that I’ll have a lower rate at age 59 1/2 (or later). Usually that’s a good bet since income and hence your tax rate typically drops in the retirement years (right?). Still it’s something to consider that it might not be the case.
Low administration costs – A little like keeping the expense ratio down on a mutual fund, low administration costs automatically save you money off the top.
Choose your own investments – SEP IRAs are like other IRAs, so you can invest in the same way as you would anything else. For instance, I could get a brokerage account at Fidelity
SEP IRA contribution limits – The contribution limit isn’t as straight-forward as you might expect. According to Wikipedia the contribution the limit is 18.587045% of your net profit. That 18.580745% may sound like a crazy number, but it’s actually derived from accounting FICA tax and other limits that are over my head. It seems like there’s an top level maximum of $49,000 in 2009. This complexity is exactly why I have tax people to help. For me this 18.58% number is looking like it might be a good thing. I could potentially be able to squirrel away more tax-deferred money with the SEP IRA than I could with a 401K plan.
SEP IRA contribution deadlines – The deadlines seem the same as other IRAs, so I should be able to simply wait until I have my taxes done in March next year and write a big check. However, in general, I probably want to be contributing a little every month and then just finish up with a bigger check to the limit as opposed to having request an IRS extension form and filling your taxes late.

Caveats of SEP IRA

SEP IRA’s aren’t all rainbows and puppy dogs… and it’s certain not a pot of gold. Here are some of the things I’d have to think about before jumping in:

All employees must receive the same benefits – Since I’m the only employee this is an insignificant factor for me.
18.587045% of net profit – I’m trying to invest back in my business with web sites so I’ve been thinking about intentionally keeping my profit low. However, my full-time consulting is essentially all profit, so that could be a significant amount.
SEP IRAs are not a free lunch – By going with a SEP IRA, I’d only be deferring paying taxes. It’s not like I get out of paying tax altogether. Then again, when looking at retirement vehicles, nothing is a free lunch, so this is to be expected.
10% early withdrawal penalty – If I try to access the money before age 59 1/2, I’ll pay a 10% penalty on the money. Do I really want to lose access to this money for the next 26 years?

In the end, I’m thinking that a SEP IRA may be a strong contender as a place where I should put my money. The fact that it’s relatively easy get up and going is a huge plus for someone as Lazy as I am.