Opinions and Suggestions Sought....

Shhhh wrote: (BIG SNIP, SEE ORIGINAL POST)

congrats - I see too many people paying for college out of current income, good for you to think 18 years out.

that $300/wk is X52 for the missus, or just 10 months? Either way, you both gross $115K which is better than top 20% of household incomes. That's good.

If I added right, you save $39.6K/yr. Nearly 35% of gross! I'd hardly suggest tightening the belt, you can take some of that to do the 529.

There was a recent thread here discussing reward cards.

That might appeal to you, or not. See

I'm sure others will catch many other points I missed, I have my hot buttons, and without the face to face questions, can't address the unasked questions.

JOE

You don't mention insurance. Being self-employed with a new baby and a new mortgage puts your family in a very vulnerable position. You need a lot of life insurance and disability insurance to protect your family should something happen to you. Thumper

You don't mention insurance. Being self-employed with a new baby and a new mortgage puts your family in a very vulnerable position. You need a lot of life insurance and disability insurance to protect your family should something happen to you. Thumper

Would a Solo 401(k) also be a good option? With the "match" that you can pay yourself you can get your yearly contribution up over $40k, right? Can you so this with a SEP as well?

-Will

Perhaps. On $100K income, he can save $15500, plus 20% of the difference up to $93K (have to subtract half his self employment tax) so the total is $31,000.

Let's assume Shhh will not crack the standard deduction amount of $10,700. Add 3 exemptions of $3400, that's $20,900. With the $20K to SEP IRA and $4000 from the wife, that's $45K off the top. That puts his taxable income down to $72K still 8K away from touching the 15% bracket. But if the $1800/mo is just mortgage (he failed to state if that included property tax and insurance) then it's maybe $15K in interest, maybe $3K property tax, and close to $3K state. That's $21K and means that the SEP IRA acheives my initial goal of defferring all income down to the 15% bracket.

Solo 401(k)s appear to be less readily available, and may have higher fees than the SEP IRA choice. I also think the few minutes every November is time well spent to decide whether a Roth conversion is in order, if the income has dropped to get into 15% land. I don't know the rules for Solo 401(k) > Roth IRA conversion. I do know the SEP IRA to Roth is simple. If his income rises, researching the Solo 401(k) may make sense, I'm not dismissing it. I do hope he and his wife are spending enough to enjoy themselves. When I hear 35%, that's my knee jerk reaction.

(Thumper is right - he must make sure he has life insurance. Sounds like $2M or so is in order. If he is in good shape I see $780 an an annual premium on

JOE

That's the limit with a 401(k), i.e. the $15.5 comes from the 401(k) "employee" contribution. That's not allowed in a SEP-IRA (only "employer" contributions up to 20% are allowed).

Note: for the self-employed, the "employer" is the sole proprietorship (business), and the "employee" is the owner/worker. That is, they're physically all one person, but there are two different "roles".

A solo 401(k) will allow the contribution of $20K, while the SEP won't (20% of $93K is $18.6K). But you can get a solo 401(k) with a Roth option that allows the "employer" to contribute up to 20% (pre-tax), and the "employee" to contribute up to $15.5K, either pre-tax or post-tax, or a mix. The person designates the type at the time of each contribution.

You can get a solo 401(k) with Roth option at T. Rowe Price, with little or no fees. ($10/year for each fund under $5K, and $10 to close out the

I don't see why it would be any different from any other 401(k) to Roth conversion - namely, you have to qualify to take the money out of a 401(k) (e.g. close down (leave) your business, or at least the 401(k) plan, file the final 5500, etc.), roll over to a traditional IRA, and then do a Roth conversion. See the Fidelity page cited above for "access to assets" info.

Mark Freeland snipped-for-privacy@sbcglobal.net

Mark - what I offered above was for Solo 401(k). I was responding to Will asking about it, calculating the maximum each plan could defer on the $100K gross.

SEP IRA - $20K Solo 401(k) - $31K after the odd math.

I failed to find Solo Roth 401(k) so, my thanks. That actually offers the perfect mix for my attempt at micromanaging marginal tax rates.

I also need to update my 529 reply - if he was planning to reduce his retirement savings to fund the 529, better to use some of the Roth and earmark for college. If (god forbid) the child decides not to go to college, the money is there, and no issue with tax or penalty. If child goes to school, the Roth still can come out tax free, and the Roth

He probably will, as interest on his mortgage will be over that for many years, depending on his interest rate.

--ron

two sentences down from that concludes he's closer to $21K. The first assumption was just my thinking out loud. Of course, you are correct, he would have more, right till the mortgage is almost paid off.

Solo 401k is relatively easy to set up at major institutions such as Fidelity or T.Rowe Price. Annual maximum cap is something like $42,000, can't remember if it is indexed or not.

Elsewhere in this thread the dual role of a sole proprietor is mentioned, the "employee" hat and the "employer" hat. Although everyone seems to have their own version of a Solo 401k worksheet, I do think that strictly speaking the employee contribution (the one that goes up to $15,500) needs to be in the form of a regular salary reduction, in other words the contributions should be made in equal installments throughout some portion of the year as if they were a payroll deduction, and definitely before Dec 31st.

The remaining amount, the employer contribution, can be made up to the original due date of the return.

I'm not sure if these rules are subject to frequent IRS audits, however. One contribution form I saw did specifically ask whether the amount was a profit-sharing contribution (employer) or salary deferral contribution (employee).

Oh yeah, one other important thing: solo 401k requires no employees, so if you have any or get any, the solo 401k is no longer an option.

-Mark Bole

I looked into this once, and I think that a sole proprietor is treated as having received a yearly salary on the last day of the year, so that the entire employee contribution could be made to a solo 401(k) at the end of the year instead of through regular salary reductions. Presumably this is because the sole proprietor doesn't necessarily have a good handle on the exact level of profit through the year?

-Will

Yes, that could work. After all, a salary deferral can be stopped and started throughout the year with a regular employer and this is supposed to work the same way. The key point is, strictly speaking I don't think you can wait until April 15th to make the entire contribution. Also I believe you have to make the full amount of salary deferral contribution before you can start making profit-sharing (employer) contributions, at least the worksheets I used (TurboTax, Fidelity, T.Rowe Price) made it come out that way -- but it's been a couple of years since I went through it.

The plan owner (the sole proprietor) is supposed to keep copies of salary deferral agreements on file, they don't get sent to the IRS but might be asked for in an audit situation. After all if you are a sole proprietor and are deferring $40K/year or more from current income tax, that's a pretty big deduction!

-Mark Bole

I missed that. :-| Sorry.

--ron