Solo 401k vs SEP IRA (Self Employed Retirement Plans)
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- เผยแพร่เมื่อ 5 ก.ค. 2024
- Solo 401k vs SEP IRA (Self Employed Retirement Plans). In this video I explain the SEP IRA and Solo 401k (also known as the self employed 401k) and compare the differences between the two of them. Until the early 2000's the SEP IRA was one of the most popular retirement accounts for anyone with 1099 income, self employed, small business owners, and the like. However, since then, for most people that are self employed and do not have any additional employees the Solo 401k has many more advantages over the SEP IRA.
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**Error in the video around the 5:32 mark where I go into some detail regarding Self Employment Taxes. The video is not correct as it stands. My intent was to demonstrate the larger amount of money you're able to save for retirement through a Solo 401k compared to a SEP IRA and in the video I specifically mention how these contributions reduce your SE Tax, but I was wrong and am sorry about that...as these contributions only reduce your Federal Income Tax liability and not your SE Tax liability. I'll be more careful in future videos when I dive into specific details like this. Thanks for your understanding...this is why I encourage people to work with a CPA to clarify/confirm whatever you may hear from a YT video...even if it is one of my YT videos.**
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Timestamps / Chapters:
0:00 - Intro
1:16 - The Basics
2:18 - Income Under $125,000
3:13 - Small Business Owners
4:32 - 2021 SEP & Solo 401k Contribution Limits
5:02 - Example
6:31 - Should I File as an S-Corp?
8:13 - Vanguard SEP IRA & Solo 401k
9:06 - Additional Solo 401k Advantages
10:39 - Form 5500 for Balances over $250,000
11:47 - Growing Business
ABOUT ME 👇
I've been involved in people's financial decisions for 15+ years (7 yrs Real Estate experience & 8+ yrs as a former Financial Advisor)...I now bring the financial successes, mistakes, failures, and best financial habits/tips to you through these videos.
My mission is to bring Financial Awareness to the forefront of your daily decisions so you can: improve your quality of life, increase your net worth, and grow upon your financial literacy. My videos are a reflection of my real-world experience as a real estate investor, stock market investor, student of finance, entrepreneur, and of course...my experience as a Former Financial Advisor.
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DISCLAIMER: I am not a financial adviser or a certified public accountant. These videos are for educational purposes only. Investing of any kind involves risk. While it is possible to minimize risk, your investments are solely your responsibility. It is imperative that you conduct your own research. I am merely sharing my opinion with no guarantee of gains or losses on investments.
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What do you think - Solo 401k OR SEP?
Sick Leave Tax Credit & Family Leave Tax Credit fro SELF EMPLOYED: th-cam.com/video/kjbpxMgL20w/w-d-xo.html
Self Employed Tax Write Offs for 2020 & 2021: th-cam.com/video/xz3N9wXPcxc/w-d-xo.html
You can have both and contribute the maximum to both right? So why not have both? Why choose just one?
Can’t have two employer qualified retirement accounts for the same company that you own at the same time.
Hello: This is a good video with tons of good information.
Have you prepared another video for w2 people with side hassles? There are some questions below about this subject. thankyou,
@uccoskun - what a great idea! No joke, I’ll work that into my current upload schedule. One of the benefits of me challenging myself to upload daily vids now in 2023 is the ability to create more content…this is a great idea and I’ll try to make a video on this topic soon. Thank you!
Thank you
Hey and thanks so much. I need a CPA and a financial advisor as soon as possible. Can you recommend what I should do? I was going to use turbotax but heard some bad things. I have a ton of money to put into a solo 401k and no idea how to get it all going without an advisor.
Liked, Subscribed.
If you have a sole proprietorship (husband and wife) in a community property state (1 schedule C and 2 schedule SE's) and you open a SEP IRA or Solo 401k do you need to contribute separately for both husband and wife or can you contribute for just one?
After we max out our roth for the year, we can contribute to the sep ira?
Can I start with a tradicional 401K and then switch to a solo 401K?
the way you hit the nail on the head with your comments you really know person types that are type me
@Ty Shad - Hey thanks, Ty! Feels like a compliment so I’m taking it as a compliment. Lol. 👍🏻👍🏻
Appreciate you taking the time to try and learn something by watching the video…hopefully there are others within my continent library that are also of interest to you. Hit me up in the comments if you ever have a question…will do my best to help or at least point you in the right direction. Cheers boss!
Excellent content. Thank you.
@Chukwudi Uraih - Thank you, sir! Appreciate you taking the time to check out the video and channel. Cheers boss!
I've had a self employed 401k through Fidelity for years. It gives me the benefit of better investments but I do have a question. Assuming I am over 55, can I qualify for the Rule of 55 early withdrawal. Also, would I be able to transfer (and have available by rule of 55) funds from a Rollover IRA. This would allow me to have access to my Rollover IRA funds earlier than age 59.5.
@mdub1419 - Here are my thoughts and a couple links...
Schwab: www.schwab.com/learn/story/retiring-early-5-key-points-about-rule-55#:~:text=This%20is%20where%20the%20rule,pay%20taxes%20on%20your%20withdrawals.
Investopedia: www.investopedia.com/rule-of-55-5324286
It is my understanding that once you do your rollover into an IRA then those funds are no longer eligible to then be rolled back over into your solo 401k account for the use of rule of 55. I could be wrong.
Additionally, as you are aware the rule of 55 kicks in when you leave your current employer...so with a solo 401k plan, I suppose you would simply just stop making money from that business that is tied to that plan...because at the end of the day the revenue generation from a solo 401k is just yourself...not really sure how the specifics work there, but a CPA could be more helpful here.
Hope all that helps! I just started some regular financial vlogs - would love for you to check those out if you have the time. Cheers!
@@Financial_Awareness Thank you for the response. I haven't checked with my CPA but.... I did call Fidelity where my accounts are, the information I got was the Self Employed 401k has fewer reasons for a withdrawal BUT "Separation from Service" is one of them. They also confirmed my rollover IRA can be transferred into the Self Employed 401k. If the account gets above 250k I'll have to fill out 5500ev for the IRS.
My Plan is: I'm 51, at 55 live off of dividends from my 401k and a 457b I am contributing to currently. It appears this looks viable. :-)
With the right attitude and motivation, it is absolutely a viable option and outcome. Love to see it!
Something similar happened to my dad…most people prob too…you hit 50 and BAM! Time to get real serious with personal finance and investing…love to see your intentionality and I’m sure it’s been happening for years for you. Congrats!!!
For an S-Corporation contributing to a 401(k) the contribution is based off of payroll salary, not distributions correct?
In the example from 7:35 you took a 60,000 distribution and multiplied that by 25% when it should have been the 40,000 salary right?
Yes. he is wrong on that.
Yo! What’s up @Deepak Jagga & @BzerkleyB ! Guess this comment slipped though the cracks…must have been busy 6 months ago because even comments like this that potentially point out a flaw in the vid I’m usually still good to acknowledge - so sorry this one slipped through the cracks…this usually happens when I have to re-watch the video to correctly answer the question. Which I just did and both y’all are wrong.
In the context in which the 25% remark was made it was after the salary deferral and I was demonstrating that you can put UP TO the max of 25% of your profit distribution into your retirement account as well IN ADDITION TO your salary deferral. So no, deepak, I was not wrong. Please watch the video again. Let me know if you still don’t follow. I just watched it and it makes sense to me. Thank you both for checking out these videos and the channel. Appreciate you investing in yourself by watching and trying to learn. Well done.
The calculation is correct but there is no SE tax in an s-cop. That's the whole reason for filing an s election in the first place. To get rid of the se tax.
Lasty, there is no such thing as net revenue. Revenue is always top line and income is your net. Quickbooks incorrectly put "gross income" at the top of your p&l... It makes a lot of accountants irritated.
This was great! Love when your kid came in 😂😂😂
I can't decide which is better for an S corp. I don't think I'll ever make enough to hit the max contribution of the SEP, but just need to put more into retirement than my traditional IRA, which I max out every year.
@matthew hoover - From all the research I've done...the Solo 401k is the way to go as long as you try to reduce the costs by managing it yourself. However, that is because I strongly value the Solo Roth 401k option for folks with higher incomes due to my belief of where tax rates will go in the future. If you do not plan on ever needing to borrow from this account OR are planning on ONLY making pre-tax contributions into this new retirement account....then the SEP IRA is more affordable and the way to go for you I'd say.
Hope that helps your thought process. Appreciate you taking the time to check out the video and learn a thing or two. Cheers boss!
Does a solo 401K work if multiple people on the s Corp? With no w2s?
@Jay - Solo 401k's are allowed for you & your spouse....if there are other parties involved other than you/your spouse then it's not a Solo 401k and you'll need to consider opening a SIMPLE IRA or perhaps a 401k.
👍🏽
Bad Anthony - Thanks man! Appreciate you.
For a single member LLC taxed as an S corp, you do NOT contribute 25% of net income! The additional "profit sharing" 25% is based on your W2 salary (not remaining distribution profits). At the 7:54 mark you clearly are given wrong information!
Hi K, can you make a video about s-corp, LLC, Sole propreitor, c-corp?
@Liza Romero - Absolutely...will throw it on my radar. I appreciate the suggestion! Thanks, boss! Cheers!
This is a great video, easy to watch and very helpful!! I would like to know, in regard to filing as an S-CORP and paying yourself a reasonable salary, in your example $40k, how is the other $60K in distributed profits actually distributed to the business owner and taxed or is it just left in the business checking account as an asset of the business and not taxed? Thank you in advance for any insight you can offer
@Jennifer - Hey thanks for taking the time to check out the video/channel and sharing your thoughts & question. My initial reaction to your question is....this is a great question to confirm & clarify with a CPA. I like to think of myself as knowledgeable enough when it comes to taxes, but I am not a CPA. I just responded to another comment (from a CPA I presume) about an error I made in filming this video - as a result I edited the video's description to clarify the mistake.
That said, S-Corps are pass through entities. Meaning that the $60,000 isn't taxed at the corporate level, but rather at the shareholder level (you). Whether the money is left in your business checking/operating account or not you'll have to pay taxes on the profit. You'll issue yourself a Form K-1 noting the profit distribution from the company on your 1040 tax return and follow the proper steps from there to pay taxes on the distribution....IRS Schedule 1, Line 5 is where you would see this figure - which would be derived from IRS Schedule E, Line 41 (page 2 is where you'll see info about K-1's). Google those IRS forms and look them over to get a better understanding. Don't feel bad if you have to look over those tax forms/documents/schedules more than once...they are all interweaved together and it can be difficult to follow at first.
Sorry for being long-winded, but wanted to help best I can. Was that helpful or did I confuse you more? Hey, thanks for checking out the video...cheers boss lady!
This video can go perfectly with your tax video for self employed people!
Unorthodox Savings - Thanks, Joe! Yeah, a subscriber had asked for more self-employed related vids...so just trying to help out where I can. Appreciate you, boss...merry Christmas and happy holidays! 👊🏻👊🏻
S-Corp Growing Business - Currently 1 employee looking to add 1 or 2 more in the next year... It seems that the SEP IRA is expensive if I'm looking to contribute 20-25% towards my account... then having to match... Can you expand on what my options are again? Seems like you were suggesting changing to NOT being an S-Corp?
@Joe Green - What's up, Joe! Thanks for checking out the video & researching this for yourself. Well done & I encourage you to watch/learn more...not just on my channel, but others as well to expand your knowledge.
If you currently have an S-Corp set up and you're growing your team...then well done! You're on the right path to growing & reinvesting your business. There are additional operating costs that are incurred with a Solo 401k that a SEP IRA doesn't have...so the SEP IRA would be the more affordable option. However, take a step back for a moment....it's called the "SOLO" 401k....if you've got employees then you're not Solo....well, unless your spouse is your other employee...that's different. With your growing business I'd suggest you research a SIMPLE IRA over both these options in this video...Solo & SEP are great options for one-man-band companies...once you start adding employees the game changes a bit. Scroll through my self employed playlist...I think I've got some videos about SIMPLE IRA's on there somewhere. Hope that was somewhat helpful. Cheers, boss!
Thanks for the videos! really helpful. quick question, for a single-member LLC, ---do you calculate 20% of the GROSS income of the business or 20% of the NET income (after all expenses are paid off) when contributing to SEP IRA? Thanks
@Ariam Isak - Hey thank you so much for that feedback! Much appreciated. It is 20% of the gross. Thank you for taking the time to invest in yourself and learning/watching videos. Cheers boss lady!
I have a side gig that brings in some income via 1099. Can I still open a solo 401K for 2022 and contribute as an employer myself to myself for 2022? Do I need to do any tax filing for it if I choose to do a roth vs traditional contribution as an employer to the solo 401K? Since I also have 401K with my full-time employer, I believe I can't contribute as an employee to the solo 401K for 2022, if its already maxed $20.5K, right? I currently have a SEP-IRA and learned from your video that I should have a Solo 401K instead. Should I rollover my SEP IRA to Solo 401K? Thanks for sharing your knowledge!
I have the same question. I maxed my 401k from my w2 employer. Can I get solo401k for my llc, if so what is the limit on that?
@jennfercen9071 - Hello! I’m sorry your comment from a few months ago fell through the cracks - so to speak. Yes, you are correct in the fact that you can open up a solo 401k, but if you’ve already maxed your 2022 401k employee contributions through another employment you have then you cannot put anymore in as the employee for 2022, but that doesn’t mean that you’re not allowed to make a profit sharing contribution as the owner…prob too late for a 2022 profit sharing distribution into the solo 401k account, but 2023 is fair game still I imagine. Please double check that you’re not able to still do this for 2022…I don’t believe you can by now, but I could be wrong.
I believe if there’s no employee contribution I to your solo401k then there cannot be an employer match (unless you set up your solo 401k plan that the employer match is guaranteed regardless - which some plans allow). At any rate, profit sharing to my understanding, is allowed….and the total that is allowed between ALL 401k accounts in your name/solo401k/W-2 401k + ALL employer contributions from all 401k’s cannot exceed $66,000.
So for 2023, $22,500 employee contribution, plus whatever W-2 company matches + profit share…let’s assume that’s another $10,000…that means $66,000 - $32,500 = $33,500 that is still allowed to go into “a 401k plan”…in this example your solo401k….please double check my response with a cpa, but I believe that means you can still make a profit sharing contribution into your solo401k as the owner (not as the employee).
The benefit to keeping the sep Ira would be that you can do either 20% or 25% of your income. Rolling your sep into a 401k plan could have some advantages, but look into your investment selection options first…as 401k plans usually have a smaller investment selection of funds to invest within when compared to a sep Ira.
You can read more about it here: www.investopedia.com/retirement/401k-contribution-limits/#:~:text=Basic%20Limits,-The%20basic%20employee&text=If%20you%20have%20multiple%20401,cannot%20exceed%20that%20%2420%2C500%20limit.
Hey, really appreciate you taking the time to invest in yourself and watch these vids…hope you are enjoying some of my newer, fresh videos. To be honest, I’m super impressed with your savings rate. Awesome!!! If you’re a super saver like my wife and I then you might have to ask yourself if you’re saving too much into a qualified retirement account…are you? Maybe, maybe not…only your financial plan will know what’s best for you, but as for my wife and I, we are choosing to NOT over-save into retirement and are excited about building a rental real estate portfolio…and I share it towards the end of this vid where I discuss our financial journey: th-cam.com/video/J7xmmvTAms8/w-d-xo.html
@uccoskun - thank you for responding! Your reply triggered my previous one just now…so thank you!
Yes, you can open a solo 401k for your LLC & max you are allowed to put in between ALL 401k plans is $66,000 for 2023 (plus another $7,500 if you’re 50+).
Really appreciate y’all being part of the channel and hope you check out some of the newer videos. Cheers!
I'm self employed, can I have both SEP and SOLO?
@Catholic Explorer - Yes you can, but the more important question I have in response is…why would you want both?
www.solo401k.com/blog/can-i-contribute-to-a-sep-ira-and-solo-401k/
@@Financial_Awareness well, I contributed to SEP already, without knowing about Solo 401k. SEP is kinda limited though. With SEP you can only contribute 20% of your AGI. Also, SEP does not have a Roth option. What I do is convert it to Roth right away.
Solo 401k has a $19500 limit and has a Roth option. I'm in 12% tax bracket. So, SOLO would be more beneficial for me, I think.
My goal is to build as much of tax free as I can, so our least favorite uncle does not take more of my money in the future.
@Catholic Explorer - Love your goal! Sounds like you just made up your own mind! Nice.
We also do not want our favorite uncle to come knocking down the road and are doing all Roth 401k contributions…employer matches and profit sharing HAS TO go into pre-tax 401k…resulting in us having a nice hedge when we go to liquidate assets during retirement. Having the option to pull funds out and pay taxes or not pay taxes (Roth 401k funds) will be nice. Appreciate you taking the time to check out the video and channel! Cheers, boss!
Is there an error at 5:30? Your example says you can put 20% into a SEP, however earlier you said it can be up to 25% or ~58k. Which is correct?
@Al Johnson - Hi! No error. 25% is what you’re allowed to put into a SEP unless you’re a Sole Proprietor in which case you’re limited to only 20%. So the answer is both are correct depending on how your business is structured. Hope that helps, boss! Hey, I appreciate you taking the time to check out the video...thanks! Cheers!
Appreciate the advice on investing in one's business first.
Thanks for the video. I'm hoping you can help me. I started working for a business as a 1099 Independent Contractor under a 6 month contract. I'm hoping it will either get extended in July or turn into a permanent position. I've never been a 1099 before, so I'm looking for vehicles to contribute to my retirement since my 401k option went away. If this position extends all of 2022, I'll probably be looking at around $70k in income, but will probably file Married-Jointly with my wife. is the Solo 401k still the best option for me? I'm still learning about how filing as married (got hitched last year) and now with the 1099 vs. w2 stuff. Thanks!!
@Ryan Wockenfuss - Hey there, Ryan! Congrats on getting hitched last year...awesome! If y'all manage your finances together as a team and openly communicate then you'll have a lifetime of joy as you build wealth together.
For the time period that you are a 1099 subcontracted sole prop you can write off many things - I have several videos on these deductions if you scroll through the channel. Vehicle deductions - yes. Retirement account contributions - yes. Is the Solo 401k a good route for you to go?....hmmm...not 100% sure without knowing what your true goals are, but I'd say it depends on how much your budget allows for you to contribute towards retirement. For example, what I mean is, if you're only planning on saving/contributing $6,000 or less...then just open up a Traditional IRA and get the deduction that way. However, if you want to save even more then you could select the SEP IRA, SIMPLE IRA, or Solo 401k. Each option will have pros/cons...I'd say the SEP is the better option for you if you value spending less money on fees and do not care about having a Roth 401k for any after-tax contributions (however, if you're married filing jointly you could still do a Roth IRA actually). At any rate, just be mindful that the Solo 401k has some additional fees and paperwork...the SEP is easier to open/manage. As I said initially though, start with how much you want to save/invest and then go from there.
Sorry for the lengthy reply. Thanks for being part of the channel and checking out the videos. Cheers!
@@Financial_Awareness Thanks so much for the reply! Based on our situation, we are blessed that I could definitely take advantage of the additional % on top of the $19,500 into the Solo...that's why I was thinking that would be the way to go. But you're talking about fees, so I suppose I need to dive a bit deeper and see what it would be like. I'd end up probably setting mine up through Fidelity where I have most of my other investments. We both have a Roth IRA that we are filling up first and then focusing on the 401k or other SEP IRA route.
Since I'm 1099 and haven't technically paid any taxes yet, wouldn't all my contributions to whatever account I set up be pre tax? OR would the Roth take taxes out based on my income and such? Thanks!!
@Ryan Wockenfuss - If you can, I would suggest getting in the habit of making your quarterly estimated tax payments. That's what I do. Some self employed folks I know like to invest their tax payment funds, but I don't like taking that kind of risk with Uncle Sam...and I stroke a check each quarter. Just don't want to gamble with the stock market with money I KNOW I need to pay the IRS within 3-12 months...but that's just me.
Regarding your question, doesn't matter if you've paid quarterly taxes or not, if you make a pre-tax contribution into a Solo 401k then it will all come out in the wash when you file your annual federal tax return and get your deduction. Even if you were paying taxes quarterly and were investing "after tax" money into your pre-tax Solo 401k....it will still be deemed a pre-tax contribution when you make the contribution and when file your return.
Regarding SEP vs Solo 401k for you...assuming you bring in $70k gross...the max you could contribute into a SEP would be 20%...so $14k. IF you are blessed as you said to have the financial budget/means to invest the full $20,500 to max out your Solo 401k then I would go that route because it allows you to invest more money...both at the employee level ($20,500) and at the self employed ownership level (matching & profit sharing). Check with Fidelity and Vanguard...maybe my memory is a bit off and their annual fees for setting up and maintaining a Solo 401k are smaller than I remember. Love that you're able to save as much as you are though....that is just awesome and I'm super happy for you and your spouse!!! If you keep up these savings rates you guys are going to have an amazing life & retirement. Just don't loose sight on qualified vs non-qualified invested dollars...if you ever want to have a chance at retiring early before 60 you'll need a non-qual brokerage account....so you may want to consider funding that account as well...just gives you more options in your 50's and beyond if you have a blended mix of non-qual, pre-tax money, & after tax money. Love it man. Keep it up!
Ive watched this video multiple times and i have just one question please. Can i have the solo 401k and then a separate roth ira? Thank you
@Fabiano Pina - Oh my goodness...thank you so much for your time & engagement! Much appreciated. YES, you can have a Solo 401k PLUS a separate Roth IRA.
For the SAME business you can only have one retirement account (solo 401k in this example for you). Completely separate from your 'business' retirement account is your personal/individual retirement account (Roth IRA in this example for you)...so again, yes, you can have a Roth plus a solo 401k.
Thanks for investing in yourself by watching the videos! Cheers, sir.
@@Financial_Awareness thank you very much! You're great at replying and explaining. Wish you were a CPA, id definitely work with you.
Have a great day!
@Fabiano Pina - Oh man that is very kind of you to share. Thank you! Yeah, love interacting with all y’all…spent nearly a decade talking with folks as their financial advisor and when I left that career path I still wanted to help and engage with others…and the comment section is where I get to do that now. Still need to be careful as to not give personalized advice, but I enjoy the questions and getting to know some folks. Cheers, sir!
This is great video. I subscribed to your channel. For your S Corp example, one would only pay self employment tax on the salary [ 15.3% x (40 - 19.5) ] . What about the 60k profit ? Don’t you pay some tax on the profit? I found it is hard to believe that Uncle Sam wouldn’t tax you on the profit. If you could shed some light on the question, it would be great. Thanks 😊
@sam park - Hey thanks for subscribing and checking out the channel & this video…awesome! Yes, Uncle Sam will def get their fair cut. The profit a self employed person distributed to themselves will still be subject to Federal Income Tax on your personal tax return.
Appreciate you taking the time to check out this video and the channel…cheers boss!
@@Financial_Awareness I also wondered how come you skipped to mention the taxes paid on the 60K profit on SCorp . So according to your example, Sole Prop taxes are 15.3% on 64,200 and Scrop taxes are 15.3% of (60,000+20,500).I do not see the benefits of SCorp here
Hi, I'm the owner and only member of my small business LLC, I paid by 1099-NEC, not W-2. The CPA said SOLO 401K only works for W-2 not 1099-NEC, is that true? Thank you!
@Cathy S - I encourage you to ask your CPA more open ended questions for him/her to clarify this more for you. When taking the election to file your small business as an S-corp…you will be a W-2 of your company…hence “solo” 401k. So the question you should be asking yourself and your CPA is: do I make enough money to justify the annual expenses/costs of filing as an S-corp instead of sole proprietor?
Hope that helps! Thanks for taking the time to check out this video and being part of the channel. Cheers!
Hello,
I currently work full time (W2). And have a side business. Right now I have a SEP IRA and a ROTH IRA. I stopped contributing to my ROTH because my business became profitable. Can I merge both of these accounts to a SOLO 401K?
My goal is to take advantage of the tax free growth in my ROTH, bit I haven't been contributing to my ROTH because I was over the income limits. Would a SOLO 401k allow me to contribute to my ROTH again? It's a single LLC and I have no employees.
Thanks!
Great video, subbed! From an account perspective, are Solo 401ks more difficult to manage and deal with than a SEP?
Thanks!
@John Cirelly - Thanks man! Until your Solo 401k gets above $250k there really isn't much to deal with...and even at that point you could transfer money out of the Solo 401k and into an IRA or Roth IRA to stay below the $250k threshold. Thanks for checking out this video and the channel...appreciate you!
2 cpas said I should have a sep Ira And 2 said solo 401k. I'm a single member llc. I'm my own business only worker. I groom dogs, no employees but myself. I use schedule c on taxes file married joint. My husband has a w2 job, doesn't work for me. I do not give myself a w2. I simply write a check to myself from my business account to pay myself. I am taxed like a sole proprietor. Can I have a solo 401k and contribute to both employer and employee side?
@Lilmish - Yes you can. However, if you do not place any value on the opportunity to open up a Solo 401k WITH a Roth provision, then I would go with a SEP IRA instead of a Solo 401k. It's less paperwork and I believe less cost to operate each year...and you should be able to invest in the exact same funds/stocks.
Also, don't overthink this too much...if you don't like the choice you make then you can pivot in future years and change it up...all it would take is you transferring your pre-tax SEP funds into your pre-tax Solo 401k funds. IMO, I would start out with SEP and see how that works out for you and then go from there. If you delay taking action because you're not sure which route to go then you won't get any deduction and won't save any money...sometimes taking action (even if not perfect) is better than doing nothing and taking no action. I know that doesn't help much, but it seems like you're doing your research and due diligence. Whether you do solo 401k or SEP the max you can contribute between all sources is $61,000 for 2022. If your income is say $100k for 2022, but you only plan to invest what you can afford to invest (say $10,000), then it doesn't really matter which one you chose. Just matters what the fees are to operate a solo 401k vs SEP and I think the SEP wins in that context. If your income ever grows to around $150k then you may want to consider restructuring how you file your taxes and possibly consider paying taxes as an S-Corp and getting organized with a salary through a payroll company...this would then allow you to have more options with a Solo 401k as you can do employee deductions and match/profit sharing from the employer side as well (again not to exceed $61k for 2022). Anyway, like I said...don't overthink it and just take action and go from there. Hey, thanks for checking out the video...hope it was somewhat helpful. Thanks...cheers boss!
For solo 401k, is it an additional 25% of distribution profits $60k or it it 25% of the W2 $40k. You mention the former but I thought it was the latter.
@Selestine Onyango - You can contribute the normal $19,500 (salary deduction) plus an employer match plus profit sharing - if you add all that up you cannot go above $58,000 in 2021 contributions into your plan. Not sure if that answers your question or not, but hope it helps. Let me know if I didn’t answer correctly. Appreciate you taking the time to check out the video. Cheers!
There appears to be some contradiction in this video. 5:28 - you went from saying you can take 25% of net business income to 20% of NBI.
@Joshua Curtis - Unless it's changed since the last time I researched this...25% if you have an S-Corp...20% if you're a Sole Prop. Hope that helps!
If you're an S Corp it's 25% of W-2 income on the corporate side and 20,500 on your S Corp W-2. All other flow through (Partnerships for example) it's 20% for simplicity.
Hey man! Your videos are incredible. Short, concise, professional, without the BS. Really quick. Can you possibly help me find out which applies to me? I'm currently a 1099-MISC, single, and make under the $75k after the write offs. The problem I have is that I'm paid as a contractor to a company that pays me. I'm not an LLC, or really (I think) a sole proprietor. It's like I'm a w-2, but with the 1099-MISC status. Does that put me in the Sole Proprietor category? Can I then set up a SEP IRA after I max out my Roth IRA?
@Mr. Zesty - What’s up man! Not sure I read your comment correctly. Did you say you’re paid as a 1099-contractor by company x…or…that company x receives income from your contractor work and then company x pays you as a W-2? Because literally in your comment you refer to yourself as a 1099 subcontractor. So I’m confused. Sorry! Kinda seems like you’re answering your own question in your comment. Lol
I’m not sure how you can be a W-2 if you’re paid like a 1099 contractor/sole prop. Did company x send you a W-2 for your 2021 income or did they send you a 1099-misc?
Regardless of your answer above, if you have ANY 1099-misc income then yes, you can open up and fund a SEP IRA, but you don’t have to wait until you max out your Roth IRA before doing so…you can fund a SEP and Roth at the same time (assuming you fall under the income limitation which it seems like you do). The amount you can put into your SEP is limited to 20% of gross unless you file as an S-Corp (in which case you could do 25%). Also, yes, “Sole Proprietor” is the way you’ll prob file assuming you receive a 1099-misc.
Hope all that helps man! Let me know if you have more questions…will help if I can. Cheers boss!
5:36 It's deductible from your income tax but you still have to pay self employment tax on your SEP-IRA contribution, so in your example is 15.3% of $100,000.
@Ruben - Dude, oh my God, you are absolutely correct and I got this incorrect. I’m so glad you pointed this out - thank you! I’m wrong and a little embarrassed, but grateful that you pointed this out.
Yes, you are correct and the example in the video isn’t correct...the example in the video refers to sole prop or someone that has no employees...in that case, yes, you are correct...the SEP contribution for a sole prop with no employees does not go on Schedule C line 19 and it does go on Schedule 1 - reducing your Federal income taxes, but not your SE Tax. The Schedule C Line 19 refers to company SEP contributions for employees of the company. Gosh, totally have egg on my face! 🤦...thank you for clarifying and correcting that example. Appreciate you!
@@Financial_Awareness Thanks you. I also subscribed to your channel.
@@Financial_Awareness Shoot!! I was hoping you were the ONE source that got it right!! ( All of us would LOVE to deduct retirement contributions above the line!!!) But no, you got it wrong.
@Cathy Clarke - Yeah, def goofed that part up! Ugh, my bad. Maybe later this year I’ll make a follow up vid and get it correct in that one. Thanks for watching and holding me accountable for accuracy. Appreciate you. Cheers boss lady!
@@Financial_Awareness I got all excited when I watched your video. Boohoo. Darn that SE tax.
I’m an SCorp for 2021. My company contributed $26000 from the business checking account directly to Fidelity under my name as a plan administrator. Since I’m doing my 1120S, wouldn’t I deduct this $26000 under the pension retirement line as a write off? This is my first time doing SCorp/1120S. I wouldn’t be able to afford doing another 25% company matching contribution. TIA!
Started with SEP but solo 401k roth was the way to go for me... great video!
@IslandTourist - Awesome! Love how intentional you were to keep learning and pivot when something better was presented as an option…some people just keep their heads stuck in the sand in their old ways. Well done to you! Hey, appreciate you taking the time to check out the video and channel. Cheers & happy new year!
@@Financial_Awareness Always trying to learn all the tricks of the trade.... maxed roth IRA, 401k, and employer profit sharing. Failed to get access to the HSA (do not think it is an option for me). From the perspective of 2021 being way better than all previous years, is there any tricks I can still utilize to help me with tax season? Always welcome professional advice. Thank you!
@IslandTourist - Tricks?….hmmmm…not sure. Do you have kids? If so, make sure you’re getting all available tax credits you might be allowed to have…check to see if any of their after school programs qualify for dependent care child tax credit.
You mentioned SEP & Solo 401k, but also mentioned employer matching to your 401k, so I’m not sure if you’re W-2 with side job or all solo with your own business…regardless, the only other ‘trick’ (lol) would be for me to encourage you to increase your revenue so that you no longer qualify for Roth IRA…if you need to buy equipment or make purchases for your business in order to be able to go up a level or two….then do it. It’ll be a write off and will hopefully help you increase/maximize your revenue. Sooooo, no secret tip/trick…just old fashioned hustling to grow your business. Green and growing or ripe and rotting. Your call. Once you’re income-phased-out from Roth IRA then go watch my Backdoor Roth video. Lol…shameless plug. Honestly though, just from the surface it seems you’re making good moves…so just keep it up broskie! 👊🏻👊🏻
Oh, one other thing that you might already be aware of….business related meals eaten at or purchased at domestic US restaurants are 100% deductible for 2021 and 2022 (instead of the normal 50%)…so if your state allows for more social interactions start taking more potential clients/business related people to breakfast/lunch/dinner…or if you are in some sort of a management position and have a team of people working for you or underneath you…go watch my vid about best tax deductions for self employed…you can rent your own home out to your business…it’s a write off for your business and a tax free small amount of revenue to yourself. Think of it this way, instead of paying a hotel to rent a conference room, how much would you need to pay to rent out a facility like that? Instead of renting a conference room…host a team meeting at your home and have your business write a check to yourself for the “rental costs.” Watch that video and look it up…most under utilized benefit for self employed business owners that have a team. 👊🏻👊🏻
i guess there is a typo on Solo 401k part at 5 min 51 sec. it listed Net Biz Inc as $81,500 however as per my understanding it should be 80k-19.5k= $80,500. is it a correct observation? thank you
@Albert Kim - Holy smokes! Wow, I’m such a goofball...great catch! Yes, in that Single Member LLC example it should be $100,000 - $19,500 Solo 401k contribution = $80,500. Really good catch! My apologies for that mistake. Thank you for holding me accountable on that math. It would impact the math slightly for sure, but I believe the comparison / difference between these two accounts still holds true. Thank you for drawing my attention to this. I’ll update my description to point it out. Appreciate you! 👍🏻👍🏻
I make less only $26k a year as self employed. How can I invest that $6000 and then deduct it during tax season? What is the process and where do I go to do this?
@Bunny Cottage - Hey Bunny! With that annual income amount I wouldn't open up a SEP or Solo 401k...I'd just stick with a simple, pre-tax, Traditional IRA. If you ever wanted to invest more than $6k then one of those other options would come into play. Step one is to open up the account...you can do this through Schwab, Vanguard, Fidelity, SoFi, or wherever you like. Then make sure you add your banking info...start making your contribution(s) and then make sure to keep track so you know how much to put on your tax return. Also, FYI, you have until April 15th to make a contribution into your Traditional IRA for 2021...so you can decide if you want your contributions now to start counting for last year's figures or this years.
Hey, thanks for taking the time to invest in yourself and watching this video...hope there are others within my content library that are also of interest to you. Thanks! Cheers!
Question: Let's say I make 20K in my self employment business. I make over 6 figures from a full time w-2 job. How do I handle quarterly taxes for that 20k throughout the year if I want to defer all of it to a solo 401k? Do I need to make the payments or is there something to submit and say you are deferring that income that was generated during a specific quarter? Thanks
@The One - Great question! My initial gut reaction is…if you’re deferring 100% of your side hustle into Solo 401k then…there are no taxes due because you’re simply deferring all of it as it comes in and dollar cost averaging throughout the year via each contribution and then investing said contribution. Seems logical to me…pretty simple and straight forward. If you’re simply hoarding the cash and making a lump sum contribution (not what I would do, but to each their own)…then in my opinion you still wouldn’t owe taxes or need to submit any quarterly tax payments because 100% of the $20k will get contributed and deferred.
However, if you’re doing $20k into your Roth Solo 401k then yeah, you’ll have to pay taxes on that money and in my opinion those taxes should be paid quarterly…it’s not hard. You can do it online or snail mail a check in like I do…and I make copies of my check and use this form here from the IRS to send in each payment…scroll down to the last few pages and you’ll see: www.irs.gov/pub/irs-pdf/f1040es.pdf
Let me know if you discover different, but I think you’re fine not paying quarterly so long as you’re deferring 100% of it.
Cheers! And congrats on having the self discipline to save 100% of the side hustle revs…sick! 😎
@@Financial_Awareness Thank you for this detailed response! Appreciate you!
Hi thank you for the video and sharing your knowledge! Question: if someone made $300,00 as sole owner of a LLC acting as S corp for tax purposes is there any benefit to doing solo K over SEP IRA since you max the $58K contribution limit for 2021?
@Minal Patel - Yes because a Solo 401k could have a Roth provision allowing you to make after-tax contributions in the amount of $20,500 (plus catch-up if you’re over 50)…then employer profit share / match would make up the remaining amount up to $58k. SEP does not allow for Roth contributions. Hope that helps!
Thanks for checking out this video and being part of the channel! Cheers!
@@Financial_Awareness So she could contribute to a Roth via a Solo 401k even if her income is above the max?
There is no income limitation for Roth 401k contributions.
Bro get to it already
I know man! Ugh, I’m so sorry…I’m a talker. Lol. I’m starting to prep some new vids…def planning on being more intentional with getting to the point. Appreciate the feedback and accountability. 👊🏻👊🏻
Love your videos! BUT, a 20 or 40k salary? Have FUN IN THE AUDIT! What business on earth is that reasonable for?
@Business Finance Coach - Hi Amanda! I’m flattered you took the time to check out the video...appreciate you! Lots of occupations out there, what do you think would be reasonable? Do you suggest a percentage formula like 40% salary / 60% K-1? Would love to know your thoughts. Thanks!
Do we have an option to contribute towards "After tax 401k" for my single member LLC (S-corp)?
If you set up your plan originally to allow Roth 401k contributions into your solo plan then you should be good and yes you can contribute to both. NO income limitation on Roth 401k contributions…so you lose out on the deduction, but you can shove $22,500 into a Roth 401k each year! Boom!
Many thanks for this informative video! I and my husband are business owner, we do not have employees, only contractors. We were considering between Simple IRA and Roth Solo 401K. We want to have an opportunity to save more for retirement instead of having money sitting in a savings account. Could you compare these two? Considering 401 K administrative cost, wouldn’t be more beneficial to open Simple IRA?
@Marta Petrash - Hey, thanks for checking this one out! Yeah, for sure...Solo 401k vs Simple IRA....I'll throw that one on my radar for sure. Thanks!
You are correct, the administration costs of a Solo 401k / 401k type of qualified account are higher due to TPA (third party administrator)....you can reduce some of the costs by taking on some of that responsibility yourself. Additionally, you mentioned "roth solo 401k" and if your goals are to get some funds growing on a tax-free then this decision is an easy/no-brainer because Simple IRA only allows for pre-tax contributions whereas the Solo 401k can have a Roth Provision. I'm thrilled that you have watched & commented on a few of my videos - so thank you very much! If you can pick up on a trend that I have pieced together through a few different videos I'm a big fan of getting as much money growing tax-free as possible. Personally speaking, we max out my wife's Roth 401k at her employment and are very pleased to have a financial plan that will allow us to have significant funds held in after-tax Roth accounts AND significant funds held in pre-tax IRA accounts - which will give us the option of deciding where to pull funds during our retirement years. Options = financial freedom = tax bracket management. Ok, long response - sorry! lol. Appreciate you being part of the channel - thank you! Cheers!
Wait... Can I have both 401k and SEP IRA ?? ( I'm employed).
@M. Warren - If you are a W-2 employee and your employer has a 401k plan AND you have some side hustle income coming in via 1099 or through a company you own (self employed)…then yes, in that case you can have a 401k (your employer’s plan) & a SEP/Solo401k (for your side hustle income).
However, if you’re referring to ONLY being self employed with one business then you can only have one. Can’t have two qualified retirement accounts per one company.
Does help clarify your question?
Thanks for checking out this video and being part of the channel. Cheers!
Hi, Nice video , but your Incorrect about the Solo 401k Self Employment Tax - Self Employment Taxes are PAID on all W2 Wages , hence 100k - Many People who just watch the video will miss these important corrections - I kindly suggest you Update the video to have correct data otherwise people who go on incorrect assumptions
@HalftimeTechnologies - Correct. Yeah, I’ve responded to other comments acknowledging this inaccuracy and my mistake...appreciate you checking out the video and holding me accountable. 👍🏻👍🏻
HI so are you saying that the self employment tax won't be 3,136 because its already paid? therefore at 8:02 I would owe nothing
I’m the majority owner of a multi-member LLC. The other members do not earn income from the business - only I do. We have no employees and no plans to hire any. Can I do a solo 401k under these circumstances? Thanks in advance!
Binging your videos is wildly helpful, thanks for breaking this all down!
I set up a Solo 401k through Schwab for the advantages outlined here, but it turns out setting up auto-withdraws and fund purchases takes a ton of paperwork and time.
Automated platforms like Wealthfront and Betterment offer SEP IRAs but not Solo 401ks, so that might be a point for the SEP route, if you value the hands-free experience. That's the route I'm learning now, but would love to know if there's another modern brokerage out there that offers automated investing into a Solo 401k.
@James - Great feedback man!!! Thank you so much for watching the video/channel and sharing your thoughts...hopefully many will find your comment and it will help them. Have you checked Vanguard's website yet? Also, if you decide to use a payroll company for your account/payroll (such as Paylocity or Paychex) then you may be able to set something up through their platforms. Sorry I don't have more of a rock-solid answer for you. Appreciate you, boss! Cheers!
I had to play this 2x because there is a lot of verbal fluff.
Your calculation of the solo 401k with an S Corp at 7:30 is way off. First, you would pay FICA taxes on the 40,000 of salary. Contributions to the 401k only lowers federal taxable income, not FICA. Second, the max profit share is calculated by taking the $40k salary x 25%= $10k.
@
Lee Jamison - Thanks for chiming in and correcting my errors, Lee! Appreciate the accountability and corrected info. I hope to be more accurate in future videos about topics like this. Cheers, boss!
I’m a small business owner. Net income is about $350,000. I want to open a solo 401k. I don’t pay myself a w2. Is there anything my cpa needs to do for me to open this? Is this something I can easily set up with vanguard or fidelity? I’d like to open this and anything else that would allow me to maximize tax savings effective immediately lol help!
HCG Diet Miami & HCG Near Me - Hello! Thanks for reaching out...congrats on the success of your business. Well done & keep up the hard work! You should provide your CPA with all the usual business revenue figures and expenses so they can advise you on the specifics of your situation, but YOU can open up the Solo 401k on your own through either of those websites/broker firms you mentioned in your comment. In the video I referenced Vanguard's website and was please with how affordable the plan administration costs seemed to be.
YES, you can still open up a Solo 401k...assuming you are a Single Member LLC or Sole Proprietor - you are limited to only being able to contribute 20% into your Solo 401k on any given year....up to a maximum of $57,000 for 2020 and $58,000 for 2021....20% of $350k is $70,000, but you're capped at $58k. If you are looking to generate additional tax savings (as you mention) then you should speak with your CPA regarding whether or not you should file your taxes as an S-Corp. If you pay yourself a reasonable salary it would provide you with an option to pay less self employment tax...you're still capped at $58,000 (SEP or Solo 401k), but the tax savings from filing as an S-Corp may be worth it for you....that's what I would do. Check out my other video about Self Employed Tax Write Offs where I discuss the benefits of filing as an S-Corp. What do you think? Thoughts? Was that helpful?
@@Financial_Awareness extremely helpful! We are in fact taxed as an s corp. For asset protection reasons due to Florida statutes, I want to set up the business as a multi member LLC and be 99% owner and have my father be a 1% owner. Would this disqualify me from opening a solo 401k???
If yes, can I have both a solo 401k and an IRA tax deduct contributions to both?
@@professionalhealthac.trthc9117 - Good stuff...the "cya" side of me wants to simply remind you of the value in working with a quality CPA in your area. If you are taxed as an S-Corp then you'll get a dollar for dollar contribution into your Solo 401k up to $19,500 and then an additional 25% contribution for your business profits...this is smart because as you know you're only paying your 15.3% self employment tax on your salary (and likely getting a deduction of $19,500 from Solo 401k)...HOWEVER...again...I advise you to speak with a CPA because if your father is 1% owner of the company I do believe that will prevent you from doing a Solo 401k....ONLY YOU & YOUR SPOUSE may be 'employed' by your business in order for you to be able to open up and contribute to a Solo401k. Lastly, the state of Florida has NO State Income Tax as you know....so...as a strategic financial move I would strongly encourage you to consider making Roth Solo 401k contributions...this will remove the tax deduction benefit from lowering your 'salary', but strategically you'd have all that money growing tax-free in a Solo Roth 401k as opposed to growing tax deferred....which is what will happen with your 25% contribution to Solo 401k ...tax deferred growth. Check out my Roth IRA vs 401k video...I think I go into more detail in that one about taxes...OH goodness...my Effective Tax Rate one would be helpful to you as well. Shameless plugs...sorry! Hope the videos are helpful.
@@Financial_Awareness gold, Thank you!
My pleasure! Also, no, I do not believe you can make a contribution into your Traditional IRA & get a deduction...you make too much money. However, you could do a Backdoor Roth if you don’t have much money in an IRA already...videos on that as well. 👍🏻👍🏻
LOL. Roblox is a great investment. Thanks for this video. I learned a lot.
I know, right! Lol. We pay their chore money in AppleCash or Robux. 😂 often times a combo depending on how many chores they got done.
They grow up fast! Thanks for checking out the vid…stoked to hear you got some value. Awesome. Cheers!
Can you buy real estate using a SEP IRA or a Solo 401K? Thanks for the video, awesome info!! 👍
@Israel Padilla - Yes you can. I have not and I do not recommend it, but yes it is possible and some do. The one person I know personally that tried to do this was not in a good place financially and she was stretching to try and make this work…it did work and she bought an investment property with her qualified account…but it was a headache at each step of the process. Be careful and read all the fine print.
Please double check the information you give out to folks that SEP IRA and Solo 401k contributions reduce Self-employment tax (starting around 5:32)- this is simply not true! They reduce only income tax.
@Andrey Savov - UGH!!!! YOU ARE RIGHT!!! Dang it! I completely fumbled that one there...thank you so much for holding me accountable for this inaccuracy in the video. I'll make a comment within the description of the video to clarify.
In hindsight, I believe I was simply attempting to convey that with a Solo 401k retirement account you can make contributions from the salary you pay yourself ($20,500 for 2022) and then also again from a profit sharing perspective as the owner/employer...hence reducing your tax liability...but you're right...only your Federal Income tax liability and not your SE Tax obligation (Schedule C, Line 19 instructions say to NOT put employer profit sharing contributions here and rather to put them on Schedule 1 Line 15 if the plan included you as a self employed person...hence NOT reducing the SE Tax). Thanks again for clarifying...egg on my face for sure!
@@Financial_Awareness Don't be too harsh on yourself, it's not a biggie, just wanted to point it out so folks don't get confused, keep up the good content on this great channel
Thanks! lol @ roblox
So much filler.
For sure. New stuff trying not to be as much.
Trying to take feedback like this and pivot for newer vids. Appreciate you checking this one out! 👍🏻👍🏻
You should teach your kids to start doing chores around the house for money... and let them buy robux!
@Kelly KX - Ummmmm…wow…do you know my wife or something? 😂…because you hit the nail on the head right there! Lol.
We make them save up cash first then they pay us cash for Robux. Also recently started talking with them about making money while they sleep and our oldest is ready to start dividend investing now.
@@Financial_Awareness I'm a financial education teacher for young kids
👈😜
They'll love it.. and realize how valuable a dollar is haha.
Thanks for your video. Helpful!
@Kelly KX - Oh wow that is super cool! What ages do you focus on? Is it private or do you do this at a public school?
Thanks for the positive vibes. 👍🏻👍🏻
If you have an extra moment, scroll through and check out the video where my kids ask me money questions…wasn’t as popular of a video, but they loved being part of the process.
@@Financial_Awareness so cool! I will. I teach freelance online + help other companies write content/courses 👍
First 5 minutes is nothing but constant patronizing self help book talk
I know. Sorry! Not my best vid. Will do better getting to the point faster next time. Cheers!
Too confusing. No need for all that opening talk. Just get to the point.
@H Xu - Roger that! Thanks for the feedback...appreciate you for sharing.