18 year old with over $100k... right move?

[drooblez23]

Hey,

I am an 18 year old in my first year of college. For a couple years now, I have been making more than your average 18 year old has. The past couple years it was $20,000 or $30,000, but this year my income has reached just over $80,000, and it should reach over $100,000 before the year is over.

I do not want to get into what I do to make this money, but I will say it is not illegal. Many people think I sell drugs or something, but no, it's not that. It's a type of online marketing, and I guess it's just something that I have a talent at.

Anyway, I have went ahead and hired an account for myself so she can take care of my taxes and everything (I am going to be paying a lot in taxes this year since this was paid to me as a sole prop and not under an LLC... I have just recently formed an LLC so I am not screwed next year).

My accountant also put me in touch with a financial guy that helps people invest their money in the right areas. This guy seems like a really nice guy and we've chatted in Starbucks about options for me.

He said my best option is for him to set me up with a SEP account where I can put money into that SEP account (up to 25% of my income) and then he will invest it in the appropriate places. He said he invests in all different types of stuff - mutual funds, stocks, etc.

Do you think this is the best option for me? I am already putting $5k away each year into roth IRA's, but that is not going to really make a dent in anything to help me get out of paying sky-high taxes.

Is setting up a SEP account the right way to go? If so, what are some questions that I should ask this financial guy?

Thank you for reading this and any input is greatly appreciated!

[TooFrugal]

Quote:

Is setting up a SEP account the right way to go? If so, what are some questions that I should ask this financial guy?

Congrats on the income increase!

You could probably save more with a 401K plan - $16,500 plus 25% of your earned income.

See the chart here -

Fidelity Investments

You can set up a solo 401K plan at places like Fidelity using their prototype plan, or pay a pension plan firm to set up your own plan for about 1 - 2K a year, tax deductible fee.

Fidelity will give you free investing advice and you can buy investments like mutual funds and TIPS at no extra charge, though their CD and money market rates aren't the best so there is kind of a fee on those in a sense since they they pay under market.

Nolo Press has some good books on setting up your own retirement plans and small business tax deductions. You can get them from Amazon.

Did your accountant tell you what taxes you would save having an LLC over a sole proprietorship? Is she setting the LLC up as a disregarded entity for tax purposes or a corporation?

I would ask this guy why he is recommending a SEP instead of a solo 401K? What are his fees? What can he do for you that you couldn't get cheaper at a place like Fidelity? How do you know he is not going to make off with your money like Bernie Madof? How many other accounts does he handle? What is his background? Does he have references? How long has he been doing this? What rate of returns have his other clients been getting? What, if any, degrees, certifications and licenses does he have?

[drooblez23]

Hello,

Thank you for your reply. She said by setting up an LLC, she would designate my LLC to be taxed as an S-corp. This way I could pay myself in "wages" (she said as low as possible) and then take the rest out in dividends.

I hope that is clear for you. I left my notes that she gave me at my office.

Thanks again for your advice!

[RonBoyd]

Quote:

Originally Posted by drooblez23 Hello, Thank you for your reply. She said by setting up an LLC, she would designate my LLC to be taxed as an S-corp. This way I could pay myself in "wages" (she said as low as possible) and then take the rest out in dividends. I hope that is clear for you. I left my notes that she gave me at my office. Thanks again for your advice!

June Walker: Tax advice for self-employed & indie is a good place (among many, no doubt) to find tax information for Indies. You may want to compare that data against the advice your own accountant is gving you.

[Martha]

Quote:

Originally Posted by drooblez23 Hello, Thank you for your reply. She said by setting up an LLC, she would designate my LLC to be taxed as an S-corp. This way I could pay myself in "wages" (she said as low as possible) and then take the rest out in dividends. I hope that is clear for you. I left my notes that she gave me at my office. Thanks again for your advice!

There are some nice advantages to this structure, but keep in mind that the IRS requires a reasonable salary be paid. In situations where the entire business income comes from one person's labor it can be tough to argue that any part of that income should not be designated as that person's salary. So, walk carefully here and consider getting a second opinion or a lawyer opinion, depending on what she means by "as low as possible."

[growing_older]

Quote:

then he will invest it in the appropriate places. He said he invests in all different types of stuff - mutual funds, stocks, etc.

If this means he is suggesting an account over which the advisor has direct authority to buy and sell on your behalf (a so call discretionary account) then this guy is probably a shark. It's hard to tell from your description.

If you have a particular talent which is going to earn you a lot of money over your lifetime, you will likely be a target for the sharks; and you will be handsomely rewarded if you educate yourself about investments so you don't have to rely so much on whatever they tell you.

[kombat]

Quote:

Originally Posted by growing_older If you have a particular talent which is going to earn you a lot of money over your lifetime, you will likely be a target for the sharks

Unless he is one of the sharks. Based on his vague description (a lucrative, fast-growing income in online marketing), it sounds like the OP is a spammer.

[dex]

Quote:

Originally Posted by drooblez23 Hey, This guy seems like a really nice guy and we've chatted in Starbucks about options for me. He said my best option is for him to set me up with a SEP account where I can put money into that SEP account (up to 25% of my income) and then he will invest it in the appropriate places. He said he invests in all different types of stuff - mutual funds, stocks, etc.

The most important aspect the broker should have is the heart of a teacher. If he is not willing to teach you why he is putting your money into an investment, it's expectations, when he will buy and most importantly - when he will sell, you should put your money in conservative investments and learn to invest yourself. His goals should be your goals and match your risk tolerance.

[FUEGO]

You sound like a smart, entrepreneurial person who can think and act independently. Maybe read this book. The Bogleheads Guide to Investing. It is a very readable primer into investing and basic enough to allow you to implement the style of investments they suggest. That way a full service broker won't be helping himself to your all-you-can-eat money buffet.

[cardude]

Quote:

You sound like a smart, entrepreneurial person who can think and act independently. Maybe read this book. The Bogleheads Guide to Investing. It is a very readable primer into investing and basic enough to allow you to implement the style of investments they suggest. That way a full service broker won't be helping himself to your all-you-can-eat money buffet.

+1

Get all the books you can find on the subject of investing and start learning. Do this now and you will not have to rely on the advice of financial advisors, and you will save yourself a lot of heartache in the future (and money).

To me, learning how to invest your money is the most important thing you can do right now. I would say more important than college, because they are NOT going to teach you how to invest and LBYM. Taking into account how much money you are able to make at such a young age, you may not have to work much past the age of 30 if you learn how to invest your money yourself (cheaply) annd LBYM.

[TooFrugal]

Quote:

Based on his vague description (a lucrative, fast-growing income in online marketing), it sounds like the OP is a spammer.

He is probably being vague as to not invite competition. Think of what the Facebook and Google guys make from their web site ideas and his income isn't improbable for his age at all.

Besides the good points Martha brought up up the sub-S, keep in mind that social security payments are based on your earnings over the years. So keeping your income low now may reduce your social security payments when you are older, or earlier if you become disabled and need to take them sooner.

I think as other have pointed out one of the best time investments you can make now is reading up on your own on how to invest your own money. Read some books and then talk to the reps at places like Vanguard and Fidelity and ask them the same questions you would ask this adviser. If he is just going to suggest mutual funds, then you are already paying management fees through the fund so why pay more fees on top of that?

[Texas Proud]

First... why go to college if you can make $100K (or I assume more if you keep it up) already?


Second, I do not think that you will have any tax savings as an S corp... it is a pass through entity and the income that it earns just 'pass through' to your return. Sure, you can take your money out as 'dividends', but AFAIK this does not change the tax implications


Third, read the comments about your financial advisor... if it were me, I would not go with someone unless I KNEW what they were getting out of me. I remeber my BIL telling me about an advisor that was in his marina... and how he could make my BIL 25% a year etc. etc.... now, this was before the crash so maybe he was doing it... but as most people have found out, the crash changed a lot. If my BIL had gone with this guy, he would have paid him a LOT of money to churn his account and would have lost him big time... a lot more than a simple plan...

[TooFrugal]

Quote:

Sure, you can take your money out as 'dividends', but AFAIK this does not change the tax implications.

I think the main focus of what the accountant is getting at is not having to pay social security taxes on the dividend portion of the income. Social security taxes are double for self employed people because they pay both the employer and employee portions.

Quote:

First... why go to college if you can make $100K (or I assume more if you keep it up) already?

I think a lot of kids go to college for the social aspects, especially if their job is working from home. But if it were me I'd consider going to school part time, and making hay while the sunshines with your web income.

[Texas Proud]

Quote:

Originally Posted by TooFrugal I think the main focus of what the accountant is getting at is not having to pay social security taxes on the dividend portion of the income. Social security taxes are double for self employed people because they pay both the employer and employee portions. I think a lot of kids go to college for the social aspects, especially if their job is working from home. But if it were me I'd consider going to school part time, and making hay while the sunshines with your web income.

opps... put down wrong info...

[FinanceDude]

Quote:

Originally Posted by drooblez23 My accountant also put me in touch with a financial guy that helps people invest their money in the right areas. This guy seems like a really nice guy and we've chatted in Starbucks about options for me.

They all seem like nice guys..........

Quote:

He said my best option is for him to set me up with a SEP account where I can put money into that SEP account (up to 25% of my income) and then he will invest it in the appropriate places. He said he invests in all different types of stuff - mutual funds, stocks, etc.

Ask him to define "appropriate places"..........

Quote:

Is setting up a SEP account the right way to go? If so, what are some questions that I should ask this financial guy? Thank you for reading this and any input is greatly appreciated!

Might be, might not be. Maybe a solo 401K or a money purchase plan, etc, etc. Ask your accountant which one does the best job of sheltering income..........

[drooblez23]

Wow, thank you for all the replies everyone. I am going to reply to some you directly, for everyone else, I have taken notes on what you've said and will be talking with this financial guy and make sure he is the "real deal".

@ Texas Proud:
Honestly, I am going to college because it's the only way I can stay home. My mom told me ahead of time, regardless of how much money I am making, she still wants me to go to college.

I know that may sound stupid... I'm making all this money, why don't I just move out and get an apartment? I definitely could, no doubt about that, but right now I just want to make as much money as I can while I am young, and not have to throw away money for an apartment.

(But I think college is a waste of time for me... except for the parties)

@ kombat:
I am sorry you think I am a spammer. Unfortunately, the majority of people instantly think of spam and scammers when they see people making "fast-growing income online". I am being vague about what I do because a ) like someone else on this thread said, I do not want to invite competition and b ) I don't want people to think this is spam.

I promise I am not spamming in any way. I am just trying to get some helpful advice on what I should do.

@ everyone else:
Thank you all for your advice, you have all provided great information for me .

[Finance Dave]

ask if he is "fee only" or commission based. Google the term "fee only financial planner" and it will explain.

You can also ask about credentials, although this is no guarantee of high ethics. CFA? CFP? CPA? too many others to list....Google them once he tells you.

Watch for "churning", which is where they buy and sell often to get handsome commissions for themself.

Everything you do with him, get in writing. If he says to you in his conference room "I can definitely get you 14% a year in returns", then ask him to put that in writing...he won't do it because he's not allowed to guarantee returns...so don't believe anything he says in that regard unless he will put it in writing.

I just helped my dad consolidate investments after he'd been with an "advisor" for 8 years. This guy was churning his account like crazy. We have since moved him to a simple strategy with nearly zero risk, and saved him $6k in fees annually he was paying to that Bozo. The guy had him invested in odd things like Muslim-friendly funds...and my dad could not point out a Muslim country on a map if his life depended on it...he's lived in Cincinnati Ohio his whole life. He also had him in the S&P for a given amount, and then in a contra-S&P fund for the same amount...tell me how that makes sense.

Be careful!

[Spanky]

Quote:

Originally Posted by drooblez23 I am being vague about what I do because a ) like someone else on this thread said, I do not want to invite competition and

Come now - share your secret of success. Competition is healthy.

[haha]

Quote:

Originally Posted by drooblez23 I promise I am not spamming in any way. I am just trying to get some helpful advice on what I should.

This makes me feel way better, because like Goerge Washington, spammers and cons cannot tell a lie.

Ha

[TooFrugal]

Quote:

Watch for "churning", which is where they buy and sell often to get handsome commissions for themself.

That happened to a friend of ours after she got divorced and she had the proceeds from the house to invest. Her post-divorce money "adviser" was selling her investments and buying new ones every few months or so in order to generate commissions for himself.