250K income - Pointers?

[Username79]

Hello,

I am 23. I make 110K from my primary job and do independent consulting on side for another approximately 150K per year in income. Last year I made 100K and did not have any additional income. The independant consulting side job started two months ago and I have so made around 50K. Right now, it is a sole proprietorship. I realize that I desperately need to see a tax attorney/CPA to begin forming an LLC or S-Corp and plan to do so in the near future.

So, at 23 my income stands to be around $250K for the next year, with the possibility of it touching $300K. I plan to make a career move in the next year or two which will bring my base income to around $300K before taxes with an additional $100-$150K from the continuing independant consulting job. If my fiance and I marry, which is probable, she should bring another 100K to the table immediately.

My target retirement age is 45-50, where upon I would like to retire with enough interest from investments to sustain a relatively "care free" lifestyle.

So far I have been able to save/invest 70% of my after tax income. My only expense is my personal vehicle. I do not own a home, and my primary job takes care of everything else (company car, gas, food, rent, etc.).

I have 90K sitting in the bank, and have been planning large buys of VFINX and other stalwart low-expense no-load funds (small cap, mid cap, large cap, international) as their prices continue to plummet. I maxed out my 401K at 15.5 last year (first year of having one) and will do the same this year. I do not have an IRA -- do not currently see the point in wrapping up too much money in funds I cannot redeem until I am way past my target retirement age, but I am considering opening and maxing out an IRA each year since the maximum contribution per year is so small.

What I am looking for here is some advice/pointers on how to proceed. I generally try to do all my own research but I am currently a bit overwhelmed at this point by the sudden influx of income, my rapidly worsening tax situation, my need to form a corporation, and the rapidly dropping prices in all areas of the economy (homes, stocks, etc.)

Thanks for reading.

 

[Urchina]

Username79, welcome to the boards. You may want to cross-post this post on the "Hi" forum as well.

I'd say get thee to an attorney who can set you up with a suitable corporation status ASAP. No point accruing assets that someone can take away with a simple lawsuit.

Congratulations on the sizable income and good job prospects. Given your presumably high tax bracket, it makes sense for you to put tax-efficient funds in your taxable account (I asked a question about putting high-yield bonds in a taxable account here and learned a lot!).

VFINX is pretty tax-efficient from what I understand. Munis may or may not be a good choice for you; I suspect that many municipalities are going to be feeling a cash crunch in the near future as property tax revenues decline and so may have difficulty meeting their bond obligations, which might increase their risk.

There's also a recommended reading list here that might be of use to you.

Good luck!

 

[Lusitan]

Vote for McCain. Obama has a bullseye on you

 

[Keyboard Ninja]

Or make sure your taxable income is less than $250k/year.

 

[Marquette]

Is your primary job as a W-2?

For your independent income, are you a 1099? If so, you the employer can contribute a portion of profits to a SEP even if you the employee are not eligible.

Depending on the work you do, I'd talk to an attorney about staying sole versus a single member LLC or S-Corp.

 

[Trellix]

I don't have any specific advice but I am just curious what field/occupation your in? Your income is very impressive for your age.

 

[eridanus]

What Marquette said.The max retirement contribution (including 15.5 for company 401k) is something like $45k this year.

Also, you need to watch your taxes else you get creamed on April 15. Send Sam some moola come Jan 15 (and you're late for the September payment, so send some in now). eftps.gov is the easiest way to transfer money to the IRS. This year, you'll probably get by with a safe harbor.

Finally, I don't see any benefit from a corporation unless you feel like you need insurance or want to put in 25% of your income into an SEP (instead of 20% as a 1099).

 

[ziggy29]

I hate to sound unromantic and I usually hate these things, but you two do marry and there is a significant difference in the assets you would be bringing into the marriage, a prenup may not be a bad idea here.

 

[jIMOh]

I might suggest looking at using dividends to fund the early retirement plan. They get favorable treatment in taxable accounts right now, and will keep pace with inflation. Use some muni bonds to offset some of the risk and tax burden as well.

Trying to defer taxes is a good idea with such a high income, most deductions will be phased out at a 300k income level, consider asking attorney what ways are possible to defer taxes until retirement (when your tax rate should be much lower).

 

[putty]

Can I ask what you consult in? When I think of a consultant I think of someone older with decades of experience who can apply this past experience to a current situation. What kind of knowledge does a 23 year possess to do this? Or is that not what a consultant does?

 

[Culture]

When I think of a consultant I think of someone older with decades of experience who can apply this past experience to a current situation. What kind of knowledge does a 23 year possess to do this? Or is that not what a consultant does?

A consultant is simply one who hires out their knowledge on a contract basis. I was working as a consultant starting at age 32-34, by acquiring knowledge in a very narrow and specialized area. Computers are a great area for working as a consultant even at a young age. I am a structural engineer, and it would be hard in my area to work right out of school.

 

[Hobo]

I was a consulting engineer and most of my life I kept myself in a corporation. At first, I was alone, then I added employees.

The advantages of a corporation are enormous - way too complex to detail here. I can list a few, however.

1. In a corporation you can write off many things as tax deductions that are difficult as an individual - ie, car, furniture, vacations, company credit card. As a small corporation, the IRS does not mess with you. The advantages here are huge.

2. Income realization - you can choose to keep the income in the corporation (an maybe pay corporate taxes). This is useful if you have a lot of personal income. Conversely, you can take income - or even borrow money from a bank to pay a bonus if your personal income is low.

3. Credit from a bank - a corporation can get credit from a bank. In time this is very useful for buying equipment (such as a home theater system) and not use your credit card. Plus it does not affect your personal credit rating.

4. In time you get a Dun and Bradstreet rating which is very useful in marketing and other business activities.

5. If times get really bad, you can live on borrowed money from the bank or sell an asset (like your house) to the corporation - and then you can declare bankruptcy without loosing your personal assets or credit. Later you can start a new corporation again with a fresh record. This is impossible in hard times as an individual.

6. Can can have all the tax advantages of a corporation (ie, profit sharing, health care benefits, etc.), and still keep all the ones you have now as an individual.

I would suggest you ask your current employers to hire you as a consultant in the name of your corporation. They like to do this because they don't have to pay half your Social Sec. tax, disability insurance, workman's compensation, etc.)

 

[putty]

That's really interesting Hobo. Thanks for that.

 

[Username79]

Can I ask what you consult in? When I think of a consultant I think of someone older with decades of experience who can apply this past experience to a current situation. What kind of knowledge does a 23 year possess to do this? Or is that not what a consultant does?

Depends what field the consultant is in. Business consulting, maybe. I do highly specialized IT consulting.

I have been extremely lucky so far. The barrier to end to this field is that you cannot get on an engagement without experience and you cannot get experience without being on an engagement, which effectively locks out most people. I decided this was my career path in high school and during college I spent my time teaching myself what I could about it. When I graduated, I was immediately on one of the more significant engagements in the world. This is skill-based consulting I have been able to acquire the relevant skills extremely quickly.

There is further specialization and higher pay which does require more years of experience. While I can already perform the required tasks, I do not have the relevant experience to charge. This is the kind of work when you fly to client site for a weekend and do a specialized task and charge $50-100K for the weekend. I expect to make this jump within the next two years, as I am currently lending my time to these efforts for free in order to get them on my resume.

 

[plex]

Hmm, considering that these can often be emergency weekend IT jobs that large businesses may require, I would guess this deals with something like emergency network support and/or data recovery (servers crash for a large company and they need they back up ASAP by the end of Sunday). This would different from just IT management and would require a very high level of experience/skill.

Very impressive getting the required level of technical skill so quickly, regardless of what it involves. Even with foresight, it really is not easy getting to that level of skill.

As to your original question, have you calculated out what you expect to need in order to retire? Do you want to continue to live on 30% of your income, or do you see yourself increasing your standard of living beyond inflation?

As things are, I think your retirement horizon is actually a lot shorter than you think if you are saving 70% of your impressive income. If you were willing to continue to live on the same amount you have up to now...you will be ready to retire in your early 30s, or will be able to retire living on 50% more than you are now if you keep working into your mid 30's with a similar income (these horizons will decrease if your income goes up significantly as you expect). The vast majority of what will propel you into retirement will be income (in your case, for most people investments are what propel them into retirement). Maximizing investment knowledge will definitely help you in the near future though, since you can reach retirement so quickly, where investment returns are very important for everyone.

My point is on this, if you were to retire at 45, you would be living on 5x what you currently do (averaged over time as a savings rate, so I mean starting now). Do you forsee increasing your spending by 5x what it is now, so that you would need to work until 45?

(I determined all of this through a retirement calculator I have that takes into account all taxes/inflation/withdrawal rates/standard income growth/standard investment growth...etc. All it really requires is a current income and a % saved to determine how much you can spend each year safely and still reach a particular retirement age).

 

[Spanky]

There is further specialization and higher pay which does require more years of experience. While I can already perform the required tasks, I do not have the relevant experience to charge. This is the kind of work when you fly to client site for a weekend and do a specialized task and charge $50-100K for the weekend. I expect to make this jump within the next two years, as I am currently lending my time to these efforts for free in order to get them on my resume.

You must be gifted or highly skilled.

I have an intern, a Ph.D candidate in computer science, developing a web application that collects medical information and stores it on a SQL data base. We pay him $25 an hour. He also has other clients for other web applications. His take-home pay was less than $50K last year.

 

[skyline]

I have managed and continue to manage a lot of IT projects. Depending on industry vertical, technology, and location, $100/hr for a skilled IT contractor is pretty common (factor in a little OT, and you're at $250K/year w/o much of a sweat). Even upwards of $150-200/hr depending on specific skill/experience. BTW, the pressure on rates have definitely been downwards the last five years or so. Used to be you could get $150/hr pretty easily if you know what you were doing and could market yourself effectively. That's probably closer to $100/hr nowadays.

$50K-$100K per weekend, however, is pretty unheard of for me - I can't imagine anyone making any firm plans around getting that kind of income on a regular basis...

 

[eridanus]

I have managed and continue to manage a lot of IT projects. Depending on industry vertical, technology, and location, $100/hr for a skilled IT contractor is pretty common (factor in a little OT, and you're at $250K/year w/o much of a sweat). Even upwards of $150-200/hr depending on specific skill/experience. BTW, the pressure on rates have definitely been downwards the last five years or so. Used to be you could get $150/hr pretty easily if you know what you were doing and could market yourself effectively. That's probably closer to $100/hr nowadays.

$50K-$100K per weekend, however, is pretty unheard of for me - I can't imagine anyone making any firm plans around getting that kind of income on a regular basis...

Right, depending on the skill and application, $150/hour isn't unreasonable. But $50k/per weekend...even in the height of the dotcom days, that'd be impossible. Unless you're Vincent Cerf.

 

[harley]

Right, depending on the skill and application, $150/hour isn't unreasonable. But $50k/per weekend...even in the height of the dotcom days, that'd be impossible. Unless you're Vincent Cerf.

Yeah, the only person I ever heard of making that kind of money was the Jackal, and I think he was fictional? And definitely not in IT.

 

[haha]

This is the kind of work when you fly to client site for a weekend and do a specialized task and charge $50-100K for the weekend.

Wow, this beats even a British Dom. Good going man.

Ha

 

[Spanky]

$100/hr for a skilled IT contractor is pretty common.

This is the rate we might pay to the contract house, not the contractor. The contractor is probably getting $70 hour.