SEP IRA vs Individual 401K

[PaloAlto]

I am self employed (1099 income as independent consultant). I have a business name I am DBA so my invoices are paid in the name of the business and not in my name. Since we live mostly on DW's income (and it also puts us in the highest tax bracket) I try to put as much of my income away as possible. I started a SEP IRA at Vanguard for this and put away about 20% of my income last year. I would love to put away more if possible and heard today on a podcast about the Individual 401k and the ability to put away 40-50K on income of around 100K. Since my consulting is a side gig, I expect to earn about $100K or so. My main gig is unpaid- cofounder of a company where I don't expect to get paid in 2017. Any suggestions on how I can invest as much as possible of my consulting income on a tax deferred basis? Can I do better than the SEP IRA?

Thanks

 

[Onward]

An Individual 401k will allow you to shelter $18k plus about 19% of your net self-employment income.

Add $6k if you are 50 or older.

Your total contribution can't exceed $54k ($60k if age 50 or older).

That's for tax-year 2017.

 

[PaloAlto]

An Individual 401k will allow you to shelter $18k plus about 19% of your net self-employment income.

Add $6k if you are 50 or older.

Your total contribution can't exceed $54k ($60k if age 50 or older).

That's for tax-year 2017.

Thanks. Do you know if the individual contribution has to be less than 20% of the income? In other words, if I make $50K can I still contribute $18K for the individual portion?

 

[Onward]

Thanks. Do you know if the individual contribution has to be less than 20% of the income? In other words, if I make $50K can I still contribute $18K for the individual portion?

The individual portion (assuming you're under 50) is limited to the lesser of $18k or your net earnings from self employment.

So yes, if you made $50k after expenses, you can contribute the $18k for the individual portion.

Your tax software (or your CPA) will calculate the maximum employer portion of your contribution.

Here's a calculator you might find helpful, though it doesn't break out employee-vs-employer portions.

 

[PaloAlto]

The individual portion (assuming you're under 50) is limited to the lesser of $18k or your net earnings from self employment.



So yes, if you made $50k after expenses, you can contribute the $18k for the individual portion.



Your tax software (or your CPA) will calculate the maximum employer portion of your contribution.



Here's a calculator you might find helpful, though it doesn't break out employee-vs-employer portions.

Thanks- very helpful. The report actually does break out the employee-vs-employer contributions as well

 

[RE2Boys]

Don't forget that the SEP IRA or 401k does not prevent you from contributing to your own Roth IRA each year.

 

[PaloAlto]

Don't forget that the SEP IRA or 401k does not prevent you from contributing to your own Roth IRA each year.

Yeah but AGI does...

 

[RE2Boys]

Yeah but AGI does...

Back door Roth's then. Contribute to a non-deductible traditional IRA and convert next day to a Roth IRA.

 

[PaloAlto]

Back door Roth's then. Contribute to a non-deductible traditional IRA and convert next day to a Roth IRA.

I stopped doing that after I left my first employer a few years back and rolled over my 401K to an IRA. I understand that having an IRA makes backdoor ROTH conversions complicated. Maybe I am wrong

 

[RE2Boys]

I stopped doing that after I left my first employer a few years back and rolled over my 401K to an IRA. I understand that having an IRA makes backdoor ROTH conversions complicated. Maybe I am wrong

Yes, having any T-IRA waters down the advantage. You would have possibly a large taxable component to the conversion. Which is why my 401k is still a 401k and I have notrolled it to an IRA. Still want to be able to do Roth conversions if I feel it is advantageous in any given year.