Retirement planning options

Here's one thought:

solo401k plans and SEPs are quite popular in scenarios similar to yours. However, both of these vehicles are employer sponsored, not individually sponsored. Are you able and/or willing to establish a legitimate company to channel your second job through?

The $15.5k limit is for employEE deferals regardless of the number of jobs you have. However, there is another limit you should be concerned with: the maximum TOTAL contribution limit. In 2007 it was $45k. So although you, as an employee, can only contribute $15,500, your employer could also contribute $29,500 on your behalf in the form of non-elective profit sharing, employee contribution matches, and Social Security integration.

In a "hobby-business" with no other employees, you are both the employer and employee so the benefits really add up.

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Who is best occupation to answer these questions for me

1) lawyer 2) tax accountant 3) CFP 4) other

Because I was seeing the same thing when I perused the IRS web site. Use the employer match or employer contribution to get around the individual max.

Right now the 10k I earn goes into the Roth for me and Roth for wife. Meaning that covers our yearly contributions and we balance the taxes out at tax time from our day jobs. If I made this more on the up and up, through an LLC or similar, I'd have more deductions (milage to and from practices and games, per diem for tournament weekends, home office expenses and similar). Not sure if the legal costs of the LLC or similar would be offset by the tax return benefits.

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You don't need an entity to use a SEP-IRA or 401k plan but you do need to factor in the contributions to your other plan, and keep your eye on those annual limits (in 2007 they were $15,500 in salary deferral, $45,000 including employer contributions). With your unincorporated biz there's no real "salary," so you end up making contributions that are part salary deferral, part "employer" contribution. The limits are set by the income of the business and some formulas - see Fidelity's site for calculators.

You can still establish a SEP for 2007 incidentally, and fund it as late as the extended due date of your return. Same funding deadline for a

401k but you need to have that set up (paperwork in) by 12/31.

As for who to advise on these questions...I'd suggest a local CPA who does mostly tax work for sole-pros and small businesses. You may get some other tax tips about that side-biz income, and the guy/gal will have software like what I was using to spit out those tax scenarios in 4 seconds. Then shop the discount brokers for the best place to open the actual accounts.

There used to be a great book from Nolo Press about all this but they stopped updating it a few years ago.

-Tad

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The easiest thing to do is just up your 401k withholding. You have another $8k to go before you hit the limit. That would go a long way toward eating up the $10k you get from coaching soccer. Between your

401k and 2 IRAs, you should be able to contribute $25,500 to retirement accounts in 2008 ($41K if your wife works and has a 401k). Are you looking to shelter more than that?

Be careful on this one. Since you participate in your employer's plan, your IRA deduction is limited. See pub 590, table 1-2 for details.

You could set up a solo 401k. I don't know if this is allowed, but if you set it up so that it only receives employER contributions, then you can also avoid payroll taxes, which is nice.

--Bill

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Oops. That's not right. I don't know what I was thinking. Solo 401k contributions are not SECA exempt, regardless of whether they're employEE or employER contributions. Sorry.

--Bill

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Tad,

How does one setup a 401k for themselves without a corporate entity of some sort (if that is what you are saying)? I don't think I've ever encountered this any you've piqued my interest.

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These really have changed the landscape for sole-pros and single member LLCs (or those including only a spouse). They can open up a solo-401k plan and it's like this on the forms - similar to SEPs:

Employer: John Smith Plan Administrator: John Smith Participant: John Smith

At contribution time John Smith fills out a form that says $15,500 is salary deferral, and $10,000 (or whatever it is) is an employer contribution, and includes a $25k check. It's all a fiction of course because there isn't any salary really when you're sole-pro, but the rules allow it. Like a SEP you can fund as late as the return's extended due date, as long as the plan is open by 12/31 of the tax year.

But...these are solo plans, with one non-spouse employee you're probably back to the hassles of a typical 401k plan. Note that all of this is set by the plan documents so you need to find a custodian offering them, though they've become quite common.

-Tad

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Thanks Tad. I am familiar with soloK plans, but I wasn't aware they allowed the discretionary freedom you describe when it comes to employer/ee contributions. I'll have to look further into it.

Thanks again.

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I looked into a solo 401(k) a couple of years ago, I thought there was an earlier deadline for the employee portion of the contribution, something like "the 15th of the month after receipt of salary," effectively making this 1/15 since a sole proprietor is considered to have received salary on the last day of the year? Is this still the case (or was it ever the case)?

-Will

william dot trice at ngc dot com

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According to Fidelity both the "employee" and "employer" contributions to a Solo 401(k) must be made by your filing deadline plus extensions. In a footnote they say that plans covering employees other than the owner and owner's spouse are subject to the "15th business day after the month in which the salary deferrals are withheld".

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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Ah, thanks for the clarification.

-Will

william dot trice at ngc dot com

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