Small Business Retirement Planning

[neatokimmo]

Here is my scenario. I make 37K at my regular job. I max out my 401K contribution there and I pay for a high deductible spending health plan ($10 a month). Because I have a child and my savings rate is so high, I do not pay fed tax. In the end, we live off of $19k or so.

So I started a home based business that exploded on me. I guess that is good but I wasn't prepared for it. I am looking at 30K profit with black Friday sales.

So my question for the investment gurus, I want to put as much of that 30K away in tax free retirement plans as I can. Since my 401K is maxed at my "real" job, how would you split up the money? All the SEP IRA, profit sharing type stuff is making my head spin. And my account speaks....well like an accountant.

I got hosed in the market (like everyone else right) on paper and I just want to boost what I can while the small biz works. It's a trend thing, I don't expect the big sales to last for more than 2-3 years (it's kid's accessories). Any help would be much appreciated.

 

[Kabekew]

First, congratulations on finding a profitable niche!

I'd just ask your accountant for the "most I can put into my SEP." With my sole proprietorship it was something like 25% of the net, but that may vary by amount. He should be able to give you a bottom line figure, though.

 

[neatokimmo]

Thanks! Is a SEP like a roth where I can make the contribution for 2011 in early 2012? I forgot to ask him that.

 

[brewer12345]

Call Fidelity and ask to talk to their small business retirement people. If you cannot contribute to a solo 401k, they will be able to advise of other options.

Its a stupidity of the tax code, but small business/self employed types have it all over the W-2 crowd when it comes to (legally) dodging the tax man.

 

[Kabekew]

I'm not an authority on this, but I recall I used to do it that way (put the money in and apply it to the previous year). I can't remember the cutoff date, but I want to say either end of January or maybe up to April.

Have you figured out how to start a SEP account and everything? If not, it's pretty easy. Start an account at a brokerage (I use Fidelity, you can do it online). Then call them and tell them to start a SEP-IRA account for you. Or maybe you can do that part online too. But it'll appear on your account, then just wire the money in per the instructions. You choose what stocks or mutual funds you want to put it in, so invest wisely.

 

[neatokimmo]

I will call Fidelity and ask them to set it up for me. I have a IRA and stock account with etrade but seriously, I just want that account to sit and stew for a year or two before I look at the balance again. I am thinking about letting my Mom change the password so I can't sneak a peak.

My next post will be "I have a SEP IRA - what stock should I buy?" lol

 

[PaddyMac]

You can save 20% of your SE income in a SEP-IRA (NOT 25% - that is for your employees only). Do the IRS worksheet and you'll see that the rules are a bit contorted for a sole proprietor but it basically works out to 20% in the end. This is all employER contributions. You have until April 15 to save it.

If you want to save more, open a Solo 401k. I just did one at Vanguard (I liked the low expense funds). You can save 20% of SE income (just like a SEP) as employER contributions, then another $16,500 as employEE salary deferrals. When you are a self-employed, all the rules about Dec 31 (or the "next month's payday" etc) go out the window. The deadline is when you file your taxes. We usually give our CPA our taxes by end of Feb so he has a month to work out how much more we can save to max out our SEPs. (You can have a SEP and a 401k by the way, just open the SEP first, and the 20% employER contributions are added together in both plans).

To open a Solo 401k, you will need an EIN (Employer Identification Number) for your business from the Federal govt. It's easy to get, don't be put off by this. I got one just by asking. But if they give you any flak, just say you are opening a 401k. If that doesn't work, tell them you also plan to hire a part time employee as you are expanding.

 

[panacea]

Wow, congrats on a nice profit. On a "smaller" profit (relatively speaking) the SIMPLE IRA allows you to put away more than a SEP IRA. I think the percentage for a SEP ends up being really close to 18% of profit, or about $5,400 of your $30,000 net. The SIMPLE limit if your under 50 is $11,500... but I'm not sure sure the SIMPLE is simple to set up! I'm sure Fidelity can help you figure out whether it's worth it though.