SEP IRA vs Simple vs individual 401k

[Earl E Retyre]

As an LLC with no employees (i.e., a disregarded entity filing Schedule C), which retirement plan is best (an SEP IRA, a Simple IRA or an Individual 401k)? Last year, I paid an expensive CPA to do my taxes. He chose a Simple IRA with a max contribution of $12,000 but when I do internet research on my own, it appears as if a SEP would have allowed me to contribute a little more and a 401k a lot more ... can anyone explain? Thanks!

 

[samclem]

As an LLC with no employees (i.e., a disregarded entity filing Schedule C), which retirement plan is best (an SEP IRA, a Simple IRA or an Individual 401k)? Last year, I paid an expensive CPA to do my taxes. He chose a Simple IRA with a max contribution of $12,000 but when I do internet research on my own, it appears as if a SEP would have allowed me to contribute a little more and a 401k a lot more ... can anyone explain? Thanks!

Yes, a Solo 401K usually lets you contribute a lot more. In 2015, you can contribute up to $17.5K ($23K if over age 50) as the "employee" (even if it is the only money you earn) PLUS about 22% (effective, for non-S-Corps) of the net amount earned as the "employer". Max of 53K total for both contributions.

This is more than can be contributed under your other options.

The bad news is that you need to set up the Solo 401K for the 2014 tax year before the end of that year (though the deadline for contributions is tax filing deadline).

I've had a Solo 401K for about 8 years. It's no problem at all to set one up and to do the paperwork. Vanguard, Fidelity, and many other places offer them now.

More here: Fido on indiv retirement plan comparisons.

Do a search on the board here and you'll find more info. And, get a new accountant, or do the taxes yourself!

 

[thefinancebuff]

As an LLC with no employees (i.e., a disregarded entity filing Schedule C), which retirement plan is best (an SEP IRA, a Simple IRA or an Individual 401k)?

If 'best' means the account that allows the highest contribution, individual 401k is the best. Depending on your income, you may be able to contribute the same amount in SEP or SIMPLE IRA as you can in an individual 401k but never more.

 

[Earl E Retyre]

Yes, a Solo 401K usually lets you contribute a lot more. In 2015, you can contribute up to $17.5K ($23K if over age 50) as the "employee" (even if it is the only money you earn) PLUS about 22% (effective, for non-S-Corps) of the net amount earned as the "employer". Max of 53K total for both contributions.

This is more than can be contributed under your other options.

The bad news is that you need to set up the Solo 401K for the 2014 tax year before the end of that year (though the deadline for contributions is tax filing deadline).

I've had a Solo 401K for about 8 years. It's no problem at all to set one up and to do the paperwork. Vanguard, Fidelity, and many other places offer them now.

More here: Fido on indiv retirement plan comparisons.

Do a search on the board here and you'll find more info. And, get a new accountant, or do the taxes yourself!

Thanks for your response. It is a shame I did not ask my question a couple weeks ago since it sounds like I missed the opportunity to set up s solo 401k for 2014 and that this would have been better for me to contribute more. One more question if you happen to know the answer ...

I had thought the CPA was calculating an SEP IRA for me last year so I opened an SEP IRA with Vanguard. Now I realize his calculations were for a Simple IRA and not a SEP IRA. Does it matter that I called it an SEP IRA in my Vanguard account and funded it with Simple IRA calculations? Or does it not matter since it is still a tax deferred account that would be treated the same from an IRS perspective?

And, yes, I will probably do my own taxes this year (as long as I can figure this SEP vs Simple IRA thing out).

 

[samclem]

I had thought the CPA was calculating an SEP IRA for me last year so I opened an SEP IRA with Vanguard. Now I realize his calculations were for a Simple IRA and not a SEP IRA. Does it matter that I called it an SEP IRA in my Vanguard account and funded it with Simple IRA calculations? Or does it not matter since it is still a tax deferred account that would be treated the same from an IRS perspective?

Sorry, I don't know the answer. My >guess< is that it matters. The programs were established by different legislation and they are computed differently.

- He let you contribute $12K to your 2013 SIMPLE IRA. Maybe its a coincidence, but $12K is the max allowable >employee< contribution to a SIMPLE IRA in 2013. In addition to that, the employer (also you) can make a matching contribution of up to 3% of compensation (or a 2% contribution that requires no employee contribution). Did that other (employer) contribution get subtracted from your earnings for taxes?

- A SEP has >no< employee contribution. The employer is allowed to contribute up to 25% of compensation. So, if you opened a Vanguard SEP and put in $12K, you would have had to have at least $48K in compensation to cover it.

- I'm not sure how to unfarkle the present situation. The options that occur to me:
1) Amend your 2013 return, recompute it showing that you put the money in a SEP. The numbers should come out the same, so you shouldn't owe anything. But, it is a hassle.
2) Ignore the situation. Make a contribution for 2014 to your SEP, and keep all records in case you need them. As far as you are concerned, your position is that you never had a SIMPLE IRA. If you are asked about this, be prepared to show your return and show that you were eligible to make the $12K tax-deferred contribution (to the SEP or the SIMPLE), and that you apparently didn't understand what your accountant had put on your tax forms.

Maybe someone will pipe up here with a better option. The Fairmark site has a lot of people who know a lot about taxes.

 

[Onward]

Here's a pretty good comparison of SEP IRA vs Individual (i.e. "Solo") 401k:

SEP IRA vs Individual 401k

The two plans have the same max contribution ($52k), though the Solo 401k allows an additional $5500 catuchup contribution.

(All number are for 2014.)

The SEP is easier and cheaper to set up and maintain, but the Solo 401k allows you to contribute more than the SEP if your self-employment income is less than $250k.

If you go the Solo-401k route, you'll need a third-party administrator. I've had good experiences with Ubiquity.

 

[Earl E Retyre]

Thanks for your responses. I really appreciate how much time everyone takes to help answer these questions so thoroughly. This forum is truly awesome.

So, I believe that the contribution I made to my SEP last year (2013) is fine. I probably could have contributed a little bit more had the CPA done the calculation correctly (but no big deal). This year (2014), I can contribute again to my SEP IRA and will do the correct calculation. And next year (2015)I can either hassle with a solo-401k and make a greater contribution or, I can just continue with the SEP IRA and keep things simple.

 

[scrinch]

I think you've got a good plan for the situation. You've been contributing to a SEP IRA even though you thought you were contributing to a simple IRA.

 

[samclem]

And next year (2015)I can either hassle with a solo-401k and make a greater contribution or, I can just continue with the SEP IRA and keep things simple.

Yes. But I hate paperwork and didn't find the Solo 401K setup to be a problem at all. Don't wait until the last minute, though. You've probably already got the Employer ID number (EIN) you'll need from the IRS (if not--it's one form to them and just a short wait).

I didn't get any additional companies involved--I just worked directly with Fidelity (Vanguard didn't offer them then, they do now). There was no setup or annual fee.

One thing to check: If you plan to stop contributing and want to start withdrawing between ages 55 and 59, some solo 401K plans allow it and some don't. You might check with whoever you go to to see what their contract says. This, BTW, is another advantage to the solo 401K vs any kind of IRA: If the documents allow it, if you stop working for a company (yourself in this case) you can start your withdrawals without penalty at age 55. With an IRA, you have to wait until 59 1/2. Yes, you can do a "72T" withdrawal from an IRA at 55 (or earlier), but the amounts are limited and some people would prefer to take out more.

Good luck!

 

[PaddyMac]

As far as I can tell from our SEP contributions, our CPA "calculates" our max amount, we invest it, and then on the 1040 there is a line where we put in the amount. Where did it end up on your return? It might be the very same line! (I'm not near a 1040 form right now)

so long as your contribution was allowed in the SEP, and you put in on the right line on the 1040, that's all that matters.


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[samclem]

so long as your contribution was allowed in the SEP, and you put in on the right line on the 1040, that's all that matters.

You may be right. It looks like SEP, SIMPLE, and even solo 401K contributions all go on Line 28 of the 1040. Mine came from a worksheet (not an official IRS schedule), so the background calculation didn't get turned in to the IRS. So, probably no red flags at this point, I don't know how things would work long term, but it's probably best to pick a story and stick to it.

Eventually, when a Solo 401K reaches a balance of $250K, another short form has to be filed (a 5500-SF). At that you're on record with what kind of pot the money is in.

 

[Earl E Retyre]

Yes, you are all correct ... it was reported on Line 28 of the 1040; it came from a worksheet (not an official IRS schedule), so the background calculation didn't get turned in to the IRS. So, I believe all is good. Thanks again for all the responses and help.