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Old 12-21-2020, 08:18 PM   #1
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Retirement planning

hello friends,

As you know, I have started working recently after long illness. I do software consulting and I have my own LLC.

My first invoice to client was sent out on 10/14/2020 after I am back to work from illness. Total earning till end of years before tax for llc will be $33,171.94

I want to pay least to no tax. so, seems like from online research I only need to open solo401k. I have govt issued medical insurance valid till mid of next year.

what other accounts should I open except 401k for retirement planning? seems like time is running out for me for this year. I did not know retirement accounts must be opened before end of year to invest for current year.

How about I shell out $300-$500 and get advice from pro retirement planner or It won't be useful?

Thanks
Sach
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Old 12-22-2020, 03:59 AM   #2
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If your income is that low, then you probably don't want to shelter it from taxes. If all of your income for the year is $33K (ish) and you're single, you'll pay 10% on the first ~$10K and 12% on the remaining $10K after subtracting your standard deduction of ~$12.5K. If you shelter it, you'll save 12 cents of every dollar, which isn't really that advantageous, especially if you'll be in a higher bracket later, which by definition you almost have to be, because 12% is a relatively low rate compared to all of the tax brackets.

But if you decide to do it anyway, then yes, I'm fairly certain you have to set up and contribute to a 401(k) by the end of the calendar year. If you haven't done it by now I doubt you can get it done by 12/31, but it might be possible. Try calling Fidelity and see how fast they can set one up for you and accept contributions.

You could also see if a SEP or SIMPLE plan can be set up in time; I'm not sure on the details of those.

You also have until 4/15/2021 to contribute $6,000 to a traditional IRA for tax year 2020. This would lower your taxes by that same 12% as a 401(k) would, but you have more time to do it. But there is also a lower contribution maximum.

You didn't ask, but you might check to see if you qualify for the self-employed health insurance deduction on line 16 of Schedule 1. You probably also qualify for a QBI deduction on Form 1040 line 13. You should also qualify for deducting half of your SE taxes - see Schedule 1 line 14.

At your income level, if you make a contribution to a 401(k) or IRA, you probably will also qualify for the 20% level of the retirement savings contribution credit. This credit is only on the first $2K of contributions though, so for you it'd probably be $400. See Form 8880.

You can shell out the money if you like, but for straightforward situations like yours I think you'll get better advice here for free.

The above assumes you're single and that you have no other income other than what you stated. You should of course check all this info out for yourself and make sure it applies and you qualify.
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New idea
Old 12-22-2020, 05:10 AM   #3
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New idea

my solo401k can be setup asap. but i have a new idea. All checks for my LLC are still with me as they were net45 which means they aren't deposited in my llc bank account as they just came in. I am asking my cpa if I could deposit them after 1st Jan and then 2020 income of my llc will be zero.

is that a good strategy or I push money in solo401k asap? I still need financial planner, as I do not know how much of my llc income should I pay to myself and how much I keep in LLC. You guys make things look easy, but they aren't at my level.

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Old 12-22-2020, 09:20 AM   #4
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Did you have any direct expenses associated with doing this consulting work? Are you in need of any equipment for your consulting in 2021?

Delaying depositing those checks will not help... hindsight being 20/20, if you had wanted to defer income then you should not have billed for the work until 2021. Besides, your clients will likely be sending you a 1099-MISC for what they paid you for your services so the IRS will know that you received the money from the clients.

Quote:
Delay income. That doesn't mean not cashing a check you received as payment, because you have received it even if you didn't cash it (remember constructive receipt). You can delay sending out bills until after the first of the year to make sure you receive the money next year.
https://www.thebalancesmb.com/timing...xpenses-398999

I think you are too fixated on not paying tax. You're in the lowest income tax brackets... 10/12%. It seems unlikely that you will be in a lower tax bracket when you withdraw from the 401k... so I think you are better off to pay the tax unless you are convinced that your tax rate in retirement will be zero.

Since it is self-employment income you'll also owe 15.3% for self-employment tax, but you get to deduct 1/2 of your self-employment tax from your self-employment income in determining your self-employment profits subject to income tax. The self-employment tax is like paying into social security, but both the employee and employer portions

If the $33,172 of self-employment income is your only income in 2020, I get that you would owe $6,701 in taxes.... $4,687 of self-employment tax and $2,014 of income tax. It's probably not going to get any better than that. Any deductible IRA or solo 401k deduction is not going to impact your self-employment tax, just your income tax.

Given that your income tax is so low, I would not encumber your savings by using a solo 401k since any money you put in it will come with restrictions.

Also see https://www.dinkytown.net/java/1040-tax-calculator.html

On the very last part, it doesn't matter... the LLC is a pass through so you are taxed on all of it whether it stays in the LLC or not.
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Old 12-22-2020, 10:52 AM   #5
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Since you're in a low tax bracket this year, I would consider a Roth IRA first. If you expect your income to go up into the next tax bracket next year, that's when 401k options will be more beneficial.
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Old 12-22-2020, 11:05 AM   #6
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OP - open the solo-401(k) today, don't know it will get open in time, but at least it will be done and ready for next year.

I used Vanguard as it has no fees , except a $20 fee per fund, so only use 1 fund until the account is high enough to have zero fees.

When you are talking to Vanguard, tell the person you would like both IRA and Roth IRA type of 401ks, as might as well get both done at the same time.

Like others suggest, I would not worry about your tax rate as it is low.
Surely you have expenses (office, equipment, postage, cell for work, etc.. ) which will reduce the stated income.
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Old 12-22-2020, 06:34 PM   #7
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okay. I had a conversation with a CFP. I was getting different advices from all over the place including my CPA. My CFP says no taxes will be due this year. He recommended opening solo 401k asap but not with vanguard. So far, CFP did not charge any fees. I will withdraw my app with vanguard. I sent docs to vanguard yesterday and today did not receive any update from them till 4 pm. I called their solo401k helpline which sent me to another helpline and then it sent me back to previous helpline. That was enough to know vanguard wasn't for me.

Since I will be going via CFP route in future, so I think I should be following CFP advice and that means no vanguard
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Old 12-22-2020, 11:04 PM   #8
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Wow. I really have to question your decision to follow your CFP's advice, mate. You wrote that your CFP said that no taxes will be due this year.... how can that be if you have $33k of self-employment income? My BS meter is buzzing! Is this CFP a CPA? Has he done your tax return or even a pro forma 2020 tax return for you? How would he know your tax situation?

Second, it seems that him recommending that you do a solo 401k but not with Vanguard is self-serving.

Good luck to you... from what you wrote I am afraid that you are going to need all the luck that you can get.
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Old 12-22-2020, 11:58 PM   #9
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Originally Posted by sourcream View Post
He recommended opening solo 401k asap but not with vanguard. ....
Since I will be going via CFP route in future, so I think I should be following CFP advice and that means no vanguard

I agree with @pb4. This sounds very fishy, i.e., hard to imagine what the planner has against Vanguard unless it serves his/her interest (and not yours).
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Old 12-23-2020, 12:34 AM   #10
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Wow. I really have to question your decision to follow your CFP's advice, mate. You wrote that your CFP said that no taxes will be due this year.... how can that be if you have $33k of self-employment income? My BS meter is buzzing! Is this CFP a CPA? Has he done your tax return or even a pro forma 2020 tax return for you? How would he know your tax situation?

Second, it seems that him recommending that you do a solo 401k but not with Vanguard is self-serving.

Good luck to you... from what you wrote I am afraid that you are going to need all the luck that you can get.
well, he said that with 19500 contribution to 401k and 25% contribution of LLC profits to 401K after reducing 19500 and standard deduction, no tax will be due likely but he said he is not CPA. what is wrong here?
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Old 12-23-2020, 12:39 AM   #11
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^ three things:

1. It's only true if you can open the 401(k) and make the contributions by 12/31. Since you haven't even deposited the checks yet, that would be challenging, especially if your bank puts any kind of hold on the deposits. If I count right, there are only six banking days left this year.

2. As noted above, a CFP recommending against using Vanguard is really weird.

3. The advice is bad. Even if the math works out, unless there's something you're not explaining to us that you explained to them, you're almost certainly better off *not* deferring the income.
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Old 12-23-2020, 12:43 AM   #12
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^ three things:

1. It's only true if you can open the 401(k) and make the contributions by 12/31. Since you haven't even deposited the checks yet, that would be challenging, especially if your bank puts any kind of hold on the deposits. If I count right, there are only six banking days left this year.
---once solo401k account is opened before 12/31, you can contribute before your tax return is due. so, your point is wrong. I can deposit checks whenever I want...and take it either way..new year or 2020

2. As noted above, a CFP recommending against using Vanguard is really weird.
--vanguard has many limitations...I will be listing them in my next post. I did some comparisons

3. The advice is bad. Even if the math works out, unless there's something you're not explaining to us that you explained to them, you're almost certainly better off *not* deferring the income.
---what do you mean? for like 33K of income, I can defer it or not defer. Both options are open as IRS is not going to come after me. but since 1099-MISC will be sent by my client, I may not defer it and invest as much as possible. and this what he advised...what's wrong here?
see inline pls
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Old 12-23-2020, 12:53 AM   #13
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I agree with @pb4. This sounds very fishy, i.e., hard to imagine what the planner has against Vanguard unless it serves his/her interest (and not yours).
as per my research online, it seems like vanguard has many limitations like allowing investments only in some of their funds and then $20 per fund charge...so if you have 4-5 funds investments with them, expect to pay $100 or more to them per year. see below from
https://www.biglawinvestor.com/the-b...01k-providers/

"Vanguard is generally my preferred provider of investment accounts. Unfortunately, the Vanguard Solo 401(k) has a few critical flaws that make it a less than ideal choice for me. First, it charges a $20 per year fee for each Vanguard fund held in the account. This is a little surprising given that Vanguard is generally associated with the lowest fees. They waive this fee if you have more than $50,000 invested in Vanguard, so for me the fee isnít an issue but I thought it worth pointing out all the same. More importantly, Vanguard still seems to be unwilling to accept incoming rollovers of IRA assets. Thatís important to me because in the future if I leave a job, I may choose to rollover my 401(k) into a Traditional IRA and then will want to move my Traditional IRA into the Solo 401(k) to keep open the ability to make a Backdoor Roth IRA contribution. For that reason, Iím not able to select the Vanguard plan. Vanguard does offer pre-tax or Roth contributions and, of course, you have access to all the Vanguard funds. Strangely, you canít access the Admiral funds in the solo 401(k), so expect to pay a little more for the Investor class shares. If incoming rollovers werenít a big deal to me, Iíd probably open a Solo 401(k) with Vanguard."

https://www.emparion.com/solo-401k-p...arison-review/
"Solo 401k Comparison: Vanguard
Vanguard has one of the best investment names in the business. They are known for having some of the lowest mutual fund and ETF around.

Vanguard offers both traditional and Roth contributions, but do not allow rollovers into their plans nor do they allow loans.​ Similar to other platforms, Vanguard restricts participant investments. Interestingly, plan investments are restricted to only Vanguard mutual funds and do not even allow Vanguard ETFs.

Vanguard does not charge any setup or annual fees, but they do charge an annual fee of $20 per fund for each fund held inside the account. Accordingly, if you have 10 funds inside your account, your fees would be $200 annually.​ The good news is that these fees are waived if you have at least $50,000 in assets with Vanguard."
Pros: Low costs. Roth option available.

Cons: Investment choices limited to Vanguard funds. No loans allowed.
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Old 12-23-2020, 01:20 AM   #14
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see inline pls
You're right on point #1.

On point #2, you might not like Vanguard's offering, and that's OK. But as three of us have said, it's weird for an advisor to specifically advise against Vanguard. Personally I'd minimize the fee by just investing in VTSAX, which is diversified across the entire US market, so having just one fund in my solo 401(k) wouldn't bother me in the slightest. And while somewhere else may be cheaper (Fidelity? Schwab?), $20 per year at VG is already dirt cheap.

On point #3, several people have answered this question several different times on this thread. If you don't like the advice, again, you don't have to take it, but the advice your CFP gave you, based on what you've told us so far, is bad advice. If you're nitpicking over "bad" vs. "wrong", many people think that someone giving "bad" advice is doing so for "wrong" reasons. Some of us also may think that giving bad advice as a professional is a professional failure, and wrong on that level.

As an aside, deferral and investment are two different things. I personally would encourage investment. I wouldn't encourage deferral.

Here are some quotes from this thread answering the question:

Me in post #2: "If your income is that low, then you probably don't want to shelter it from taxes. If all of your income for the year is $33K (ish) and you're single, you'll pay 10% on the first ~$10K and 12% on the remaining $10K after subtracting your standard deduction of ~$12.5K. If you shelter it, you'll save 12 cents of every dollar, which isn't really that advantageous, especially if you'll be in a higher bracket later, which by definition you almost have to be, because 12% is a relatively low rate compared to all of the tax brackets."

pb4uski in post #4: "I think you are too fixated on not paying tax. You're in the lowest income tax brackets... 10/12%. It seems unlikely that you will be in a lower tax bracket when you withdraw from the 401k... so I think you are better off to pay the tax unless you are convinced that your tax rate in retirement will be zero."

Agapostemon in post #5, "Since you're in a low tax bracket this year, I would consider a Roth IRA first. If you expect your income to go up into the next tax bracket next year, that's when 401k options will be more beneficial."
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Old 12-23-2020, 01:37 AM   #15
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You're right on point #1.

On point #2, you might not like Vanguard's offering, and that's OK. But as three of us have said, it's weird for an advisor to specifically advise against Vanguard. Personally I'd minimize the fee by just investing in VTSAX, which is diversified across the entire US market, so having just one fund in my solo 401(k) wouldn't bother me in the slightest. And while somewhere else may be cheaper (Fidelity? Schwab?), $20 per year at VG is already dirt cheap.

On point #3, several people have answered this question several different times on this thread. If you don't like the advice, again, you don't have to take it, but the advice your CFP gave you, based on what you've told us so far, is bad advice. If you're nitpicking over "bad" vs. "wrong", many people think that someone giving "bad" advice is doing so for "wrong" reasons. Some of us also may think that giving bad advice as a professional is a professional failure, and wrong on that level.

As an aside, deferral and investment are two different things. I personally would encourage investment. I wouldn't encourage deferral.

Here are some quotes from this thread answering the question:

Me in post #2: "If your income is that low, then you probably don't want to shelter it from taxes. If all of your income for the year is $33K (ish) and you're single, you'll pay 10% on the first ~$10K and 12% on the remaining $10K after subtracting your standard deduction of ~$12.5K. If you shelter it, you'll save 12 cents of every dollar, which isn't really that advantageous, especially if you'll be in a higher bracket later, which by definition you almost have to be, because 12% is a relatively low rate compared to all of the tax brackets."

pb4uski in post #4: "I think you are too fixated on not paying tax. You're in the lowest income tax brackets... 10/12%. It seems unlikely that you will be in a lower tax bracket when you withdraw from the 401k... so I think you are better off to pay the tax unless you are convinced that your tax rate in retirement will be zero."

Agapostemon in post #5, "Since you're in a low tax bracket this year, I would consider a Roth IRA first. If you expect your income to go up into the next tax bracket next year, that's when 401k options will be more beneficial."
yeah..I did not like vanguard CS....rep was not confident that account will be opened before EOY and he did not reply my emails. further, I called their toll free number and then they pushed me to another number which then pushed me back to earlier one. Then some negative points on internet about vanguard individual 401k. after that comes my CFP views. I had problems with vanguard in august when i tried to open account with them. they could not verify my identity and asked me mail whole application. so, vanguard was gone!!

for third point, do I need to open another account to contribute post taxes? Normally, i will follow simple strategy i.e contribute as much as possible before tax and then after tax
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Old 12-23-2020, 02:02 AM   #16
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Fair enough on the points about Vanguard. There are plenty of providers out there. I think I and the others who have commented would suggest that you be wary if the CFP you're working with refers you to a provider with whom he may have a cozy relationship. This can indicate kickbacks ("referral fees") and a less than fiduciary attitude towards your money - meaning, they are working for themselves more than you.

^ #3 - Well, if you choose to invest, then most people would do that via a brokerage account. If you already have one, you can just add the money to that. If you don't, you'd need to open one.

The simple strategy is a good one but is generally applicable to those who are currently in a high tax bracket and expect to be in a lower tax bracket in the future. Your situation happens to be closer to the opposite, which is why several people here have suggested the opposite strategy - save after tax first, then pre-tax once you get into the higher brackets.
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Old 12-23-2020, 02:09 AM   #17
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Fair enough on the points about Vanguard. There are plenty of providers out there. I think I and the others who have commented would suggest that you be wary if the CFP you're working with refers you to a provider with whom he may have a cozy relationship. This can indicate kickbacks ("referral fees") and a less than fiduciary attitude towards your money - meaning, they are working for themselves more than you.

^ #3 - Well, if you choose to invest, then most people would do that via a brokerage account. If you already have one, you can just add the money to that. If you don't, you'd need to open one.

The simple strategy is a good one but is generally applicable to those who are currently in a high tax bracket and expect to be in a lower tax bracket in the future. Your situation happens to be closer to the opposite, which is why several people here have suggested the opposite strategy - save after tax first, then pre-tax once you get into the higher brackets.
you are right about CFP. But to someone like me who is starting out, some help is better than nothing. He did fill in some gaps in my knowledge but i will be careful. I started working since oct 10 so it's just around 2 months of work as 50% dec is mostly vacation for me as per my company policy for contractors. they do it every year...so, next year, i will be making around 160K...some solo401k people make like 450K...I need to find out what they are doing...big money...I need motivations
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Old 12-23-2020, 02:17 AM   #18
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just checked, first invoice was sent on 14th oct and last on 14th dec...after that i am on vacation till end of year..so making 33K in around two months is not bad.
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Old 12-23-2020, 07:47 AM   #19
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well, he said that with 19500 contribution to 401k and 25% contribution of LLC profits to 401K after reducing 19500 and standard deduction, no tax will be due likely but he said he is not CPA. what is wrong here?
Self employment tax will be due since the $33k is self-employment income and will be reported on Form 1040, Schedule C.

The CFP is correct that you may be able to avoid income tax, but given that from what you wrote it seems that your taxable income is in the lowest two tax brackets (10% and 12%), unless you expect your taxable income to be below zero when you are retired you might be avoiding 10%/12% now to pay more than 10%/12% later.

In addition, the amounts that he is suggesting might exceed your taxable income and you would get no tax benefit from any contributions once your taxable income is $0. Also, tax rates are likely to increase in 2025 when the 2017 Tax Act individual tax brackets sunset.

Did you run your situation through the dinkytown tax calculator link that I provided in post #4? If so, what was the result?
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Old 12-23-2020, 09:00 AM   #20
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I have a similar situation. My research moved me to open a solo 401k and plan max it out. My wife puts us in the 24% bracket.

Vanguard was extremely helpful in setting it up on the first call and it took less than 20 minutes. You are correct that if over $50k, no fees. I am going to use this account for my VTSAX holding anyhoo.

Plan on a minimum of SS & Medicare or 15% of all income. Then your tax bracket on everything over standard deduction & 401k contribution to be safe.

CFP is hopefully not trying to push a company that pays him.
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