Self-Employed Solo 401(k) or SEP IRA? Determining the Best Retirement Strategy

Transcript:

(00:00) but if you’re someone that’s self-employed and you didn’t have a 401k plan at a job cuz you don’t have one you’re self-employed it’s up to you to set up your own retirement account this is what this was made for It Was Made For You self-employed pension that’s where it kind of originated that name is really an old school strategy but it still has a place in a very unique scenario which is perfect timing for this time of year if you’re a sole proprietorship and you want to set up a solo 401K for the prior year you would
(00:25) have had it done that way welcome everyone to the directed Ira podcast this is Matt soron joined by the insatiable Mark J ker satiable that’s the new one I like for you because you just can’t get enough of Mark J ker thank you I appreciate that yeah and today we got an awesome topic though we’re talking about solo 401ks versus seiras I don’t know if we’re going to take a position ourselves here you got to argue for one I’ll argue for the other you know I just I used to be very anti-ep until I realized there’s a great
(00:54) spot for him and so I I I can’t beat him up too badly so but I will say this the SEP IRA that’s s self-employed pension that’s where it kind of originated that name is really an old school strategy but it still has a place in a very unique scenario which is perfect timing for this time of year so let’s break it down I mean maybe we start with what is best and I think we can both agree that the solo 401K is where you want the solo 401K is best we’re going to explain the differences here and we’ll we’ll dive into it but
(01:28) the bottom line let me just say this for a solo 401k or SEP IRA this is meant for the self-employed person that has no employees we’ll come back to this on the SE Ira there’s a little wiggle room there um that has no employees now this could still be business partners or family members that work in the business you’re okay but the solo 401K in my mind is the right plan you should set up because you can put a shiz ton of money in it well and I’m going to say to I’ll vary a little bit the solo 401K could be a good fit as a stepping stone you could
(02:00) use it if you had part-time employees or maybe you just had your first full-time employee but they haven’t even been with you that long you you could you could get a little juice out of a solo 401K for a year or two yeah um so I don’t want to say they’re all or nothing but for any of you out there that currently have full-time employees or part-time employees that have been with you for over a year or more um we could get into the minutia there but the point is if you already have employees yes the solo is Untouchable but if you’re on the cusp
(02:28) of hiring some or you think you’re going to hire some employees don’t shy away from the solo yet you know you can get a little juice out of it and we may even play the the solo 401K SE combo for a couple years there’s some techniques yeah so yeah there might be some strategies and sometimes that juice is worth the squeeze guys man I just set that one up perfect was just like you lobbed it right across AC home plate all right well let’s talk about why the solo K is cool let me just hit that for a second here because let me just say this
(02:58) you can put $669,000 a year in a Solo k I can put $7,000 a year in an IRA cool but if you’re someone that’s self-employed and you didn’t have a 401k plan at a job because you don’t have one you’re self-employed it’s up to you to set up your own retirement account this is what this was made for it was made for you okay so you set up this solo 41k it’s an actual 401k plan you have to have a pre-approved plan document which we have and then it allows you to be as employee of the business someone who puts money in and then the company your
(03:28) own company throws in a match similar to the typical type of 401k but the way the numbers work out is it’s an amazing way you can get in $69,000 a year and that’s if you’re underage 50 could be more if you’re 50 or older so just in the last couple weeks I did a video on the mega backdoor Roth which is a play off the solo because what you’re trying to do with this Mega backdor Roth if you watch that video and now you’re here learning a little bit more about the solo 401k and SE and that Dynamic the when Matt said
(04:00) you could do seven in a Roth and then you could do 69 and 41k the real magic is doing both so you start with the regular Ira or Roth IRA then you throw this four solo 401K on top of it and you can go into the $76,000 range if you want when you combine the two but the beauty is you get to choose that amount a lot of times we have clients that are like okay I ran out of money okay that’s enough and so you can work up to that amount now the clients that are really killing killing it and they’re having a great year
(04:32) they’re going to use that solo 401k to the max use the Roth IRA to the Max and do that kind of combo uh backdoor Mega backdoor Roth which is a whole other topic whole other video but um that’s where the solo kind of plays into it too yeah and if you’re like well I got employees Matt and Mark I want to do the solo okay how can I do it can I set up this entity over here but I’ll have my employees over here in this company and get around it no okay this is not what this is about strategies for that that stuff does not work and maybe you do
(05:01) have other businesses with different partners that are separate divisions that’s possible you need some tax legal planning on that but for the self-employed person and this is like you get you usually kind of get this Lane of two options solo K and set by now on the set bya side I know a lot of people are like well I can put $69,000 in a seta too Matt and I don’t have to set up a whole 401k plan for it I can just fill out some forms and but the juice is not worth the squeeze is it is not is it’s it’s it’s less worth it yes
(05:33) you kind of you kind of lobbed it I went and gra it there’s less juice coming out of that squeeze all right in the St yeah so why don’t you explain that like because it or I’m i’ love to hit it but like I’ll give it a shot and all I think sometimes you and I say things in different ways that can really resonate with our listeners and we’re going to give you deadlines here too we’re right now in July uh and during the year this is a time where you can still take advantage of one or both of these strategies depending on your situation
(06:02) for 2023 for 2023 last year guys there’s tax saving still if you’ve extended your return absolutely so we’re going to uh give you deadlines and dollar amounts here in a moment but stay in conceptually with this the problem with the sep even though you can get to the same Finish Line you’re like I’m going to put in 69 Grand the solo 401K lets you get there with less payroll and when you have less payroll you pay less FICA and I want to pay less f word I do not want to p pay F but on the set I get to the same Finish Line but I got to take
(06:34) more payroll to get there that’s it that’s why the juice is not as worth as much because you got to squeeze more out in other tax dollars that’s not fun yeah but if you have some employees you might do a temporary fix there we’ll come back to it but that’s the bottom line problem a solo 401K you get to the Finish Line faster all right now let’s put some actual numbers on it and do an actual example here let’s say you have an S corporation and you take a W2 of $50,000 that’s the critical number here is what’s on the W2 either for your set bya
(07:07) contribution or for a solo k contribution all right now here’s how much you can put into a SE Ira off of a 50k W2 12,500 25% the rule is 25% of whatever your W2 is can be contributed into your SE Ira when you have an escorp and we love as corporations for small business owners now in a Solo K it gets a lot better in fact more than double okay the first thing you get to do in a Solo K is you get to put in $23,000 as long as you made $223,000 that’s for your 2024 contribution plus you get to do the 25% of that 50k so now I’ve got 12,500 plus
(07:48) 23,500 I’ve got 35,500 that I can put in to a solo 401K versus only 12,500 in a SE IR this is why 99 out of 100 of our clients do a solo over a seire okay now let’s do it I love that example that’s an sccp with 50 Grand in payroll and your old school account might recommend a set you’re going to go I remember Matt’s example no way all right awesome example Matt now I’m going to add example number two let’s say you’re a sole proprietorship you’re a single member LLC uh you haven’t made an S election yet for whatever reason and you’re on a schedule
(08:25) C is in Charlie okay you make that same 100 Grand make the same 100 grand well one of the problems why we don’t like that Soul prop in this situation first is you’re going to pay self-employment tax at 15.3% off the top so that’s $15,300 in self-employment tax now if I choose SE I still get to choose between SE 41k if I choose SE I can do 25% contribution on that whole 100 Grand and this is why old school accountants may say oh don’t make the S election because you can only do 25% of your salary well so they keep you in
(08:59) this schedule seed that’s a nightmare and you get the 25% on the 100 Grand which seems great you get your 25,000 but I had to pay $15,300 in FICA to get there well luckily you at least find someone that was born in since 1980 and you say I’m GNA have to do a solo 401K in that Soul prop still not great but here’s what happens there you still pay your 15.
(09:27) 3% so $15,300 goes out the door but you get to do 20% of the profit so that’s 20 grand again an old schooler might go well you get to do a sub of 25% with a solo it’s only 20 yeah it’s 20% but you also get the deferral of 23 so on that sole proprietorship with a solo even though you took that big crappy haircut of f of 15,300 I can do my 23,000 deferral and I get 20 % of the profit so I’m now at $43,000 in contribution with $5,300 in F which kind of sucks but it compared to the sep it kills it now circling back to
(10:12) yours MH if I do the 50,000 in payroll you might go H well I can only make the contribution off the 50k yes right so 355 but how much did you pay in F yeah but I saved I paid half I paid half in F you save 7500 so you’re a ahead of the curve I’m paying less tax to do 355 mhm and that’s why the es Corp wins in that situation too this this is why we are ESC Corp solo K guys yes that’s what we are because we pay less tax there’s less FICA and I can get more in a contribution on that es Corp solo structure I can get more in pay less tax
(10:52) I get more bank for my buck this juice is freshly squeezed with less pulp F being the pulp ex very you analogy you brought that together now I will say this if some of you are like oh my gosh I got to listen to that again my brain is mush this is why doing a consult this time of year with a certified tax adviser from our Network or in our Law Firm to help you make the decision on what you want to contribute for last year and how you maybe need to restructure for 2024 because you can go man this is so and this is confusing man
(11:26) I we were like looking up our notes what’s our deadlines how much we’re okay we do this every day and we had to confirm these numbers just to give a basic example so don’t feel overwhelmed don’t beat yourself up get an adviser to apply it to your situation because married or single employees or no employees yeah and we’re going to hit the deadlines what’s the deadline to set this up if I don’t have any one of these types of plans what can I still set up for 2023 okay as we’re sitting here in 2024 so we’re still going to come back
(11:56) and hit that I also want to say one of the things that’s Chang changed as of last year was we used to say use a solo K instead of a seta because you have the option of doing a Roth account in a Solo K and SE IRAs typically over the last 20 30 years since they’ve existed you could only do traditional dollars but starting last year the iris still hasn’t given approved documents yet on this so it’s not reality but it’s coming out is you can do a Roth SE Ira you can have Roth dollars technically in a SE Ira once the
(12:27) IRS gets their act together and we get some forms out on that now before deadlines can I add one other Factor early on we said where the set might work is let’s say you do have a full-time employee but they’re just coming up on that one-year anniversary when you hit that one year they hit that one-year anniversary the solo K is dead and you’ve got to just roll it out to an IRA which is fine you may have been funding that solo 401K now you have a full-time employee you’re expanding you’re scaling that’s cool or you could
(12:54) move to like a group 401K with with all the employees for planing to add more it might be a good company benefit yeah and right now the deadline for to start your group or Safe Harbor 401K is October 1st so this is for 20124 so that way you can be very proactive for this year but if you have a full-time employee now here’s the SE angle you can have a full-time employee up to two years before you can’t play in the sep so the sep gives you this extra year even though we don’t like the numbers they’re still better
(13:25) than a safe harbor when it comes to what you can put away so that’s why in a personal consultation we may say all right let’s pull the trigger on a set not ideal but at least we can get one year of juice out of that yeah before we go to the safe harbor yeah let me say this is actually so you get a next additional two years on top of the one so let me that’s right way so like if you have that employee that’s been there for a year and you’re like I can’t do a solo K anymore well you can do an aepa for another two because the way they
(13:54) look at employees in a set bya is you have to include employees in your set bya plan if they’ve worked for you for three years out of the last five any threeyear connection that they worked for you in the last five so pretty much just think of it as a three-year rule you know unless you have employees that leave and come back then you got to add it up within the five-year window but otherwise just think of has an employee worked for you for three years so we buy a little more time and for a lot of small business owners or people that are
(14:20) that are self-employed that are starting to add employees they might have them kind of come and go no one’s there yet for three years they kind of a smaller operation and um so the set by that’s where we’ve been using it most is those people that are kind of like crap I don’t qualify for the solo K cuz they got this assistant that works for me or this other person on my payroll now that’s been there a couple years but I got another year or two of of SE Ira left in me and so I want to contribute to that because again the SE Ira is
(14:46) better than the 7,000 Ira it’s just not as good as the solo K so when we’re crapping on the SE Ira we’re crapping on it because the solo G is better when you can use it yeah they’re still they’re just a middle yeah they’re Plan B you want you want go with plan a now one other Factor before we do deadlines too that we haven’t brought up you can self-direct any of these plans by setting them up through our Kos lawyers with a full service or going to direct at Ira whether it’s an IRA a Roth a sep a solo or even a safe harbard we’ve got the
(15:17) connections to help line you up there but you can self-direct these plans when you go to invest the money so don’t feel like you have to be held captive at a Fidelity broker dealer type scenario when you’re setting up these plans either we’ve got you a directed IRA and at kqs lawyers to help build the right plan for you yeah um all right let’s hit deadlines though for seira and solo 41 for 2023 for 2023 because some of you have extended your return and you might be looking for some tax seductions and strategies this is always one of the
(15:49) ones on our list our tax lawyers at kulus ERS I mean we have like a more than a 25 Point checklist but this is one of the points all right this is a good one this one we love of course because it it gets into Building Wealth and long-term wealth and for your your future and your retirement okay in a SE Ira your deadline is your company tax return deadline so if you’re an escorp or a partnership that’s March 15th if you’re so prop this is April 15th plus extensions so I can still be setting up if you’ve extended your returns your
(16:19) business return and your personal return for you Soul props you still have time to do a set bya for 2023 love it all right now solo Cas it gets a little confusing it’s a little complicated because we’ve had a lot of laws pass secure 1.0 secure 2.0 and they change the rules for ES corpse but not for soul props so it can get a little messy there and it depends on essentially when you set up your solo 401K so I’ll say the easy part yeah if your solo 401K was set up last year or earlier and whether you’re a soul prop or an escorp and you
(16:51) have extended you got some time you have tell September 15th if you’re an escorp you have tell October 15th if you’re a soul prop that’s if your 401k was set up last year or earlier you got time that’s cool yeah you could still be making employee and employer contributions now for those of you that are ESC corpse you again you set up your solo K already last year your employee contribution is tricky because that should have been on your W2 by January 31st so you might just have time to be doing your employer
(17:20) contribution and by the way that 23,000 we call it the deferral that’s the employee contribution part the 25% is the employer contribution part we’ve got an article we’ll link here that goes over the contribution deadlines and rules as part of this podcast for solo case because it can get confusing right that’s that’s what you know that’s why our Law Firm exists because of rules like this um yeah and that’s why wealthy people have a tax lawyer on in their back pocket and we are not that expensive you may spend a few hundred
(17:54) having a consult once or twice two three times a year to help button down some of these issues and it can make you Millions it really can putting this type of money away every year for just 10 years you could have a couple million tax free in 10 years it’s just amazing all right now let me hit the rule for let’s start with soulle props first okay if you’re a sole proprietorship and you want to set up a solo 401K for 2023 for the prior year you would have had to done that by April 15th even if you’ve extended your return and this would be
(18:26) your personal return even if you’ve extended the return IRS is like nah no dice now if this was February or March you would have had time because it was before April 15th and you still could have made those contributions and got the plan set up that’s the rule if you didn’t have the 401K set up last year right have no solo K now let’s say I’m an escort and I didn’t set it up last year am I hosed as well no the nice thing about that is in Secure 2.
(18:51) 0 they gave you more time and they said actually for you escorp owners if you set up a solo K we will let you set it up up until the extension deadline for the prior year so now the against you’re going to have March 15th or up to September 15th if you filed an extension now important note I would say is that doesn’t mean you can make an S election for 2024 and get this option yeah someone was thinking that huh yeah someone was already like oh I’ll make an S election right now I’m good no that S election must have been in effect for
(19:24) 2023 you just never got around to setting up your solo 401k and they’re like that’s cool until September 15th and again that’s the employer match portion so at least you’re getting some juice out of it which is still better than a SE yeah so and so for really practically speaking right now if you’re like well I want to set up a solo k for 2023 I’m an escorp you say it’s it’s game M it’s game for employer contributions okay so this is the 25% now next year you’ll be able to do the employee and the employer but you’re not
(19:53) going to be able to get the employer contributions in because you didn’t have the W2 by January 1st 31st and you would have had to actually elected the deferral back in the year now what Matt has opened the door to is the only in my opinion second reason why you would use a SE because with that rule change that just occurred it it made the sliver of when you would use a sep even smaller so the first reason remember everybody you’ve got full-time employees that have been around for at least a year you’re like eh I’ll have to go with the sep I
(20:25) bought a couple extra years I’ve got my that three-year rule Matt talked about in this other sliver you didn’t get your solo 401K set up by April 15th you’re a soul prop man I guess I can at least go use the sep and that’s correct you have until October 15th right yeah and I can set up a sep for 2023 and get at least some nice contribution into my se but the cool part that I’ve liked is that that’s only going to be a short-lived experience cuz you know better now so you’re going to go out and open up that solo 401K the sep’s going to live about
(21:01) 3 days and then you’re going to roll it into the new solo 401K so it’s it’s just a quick fix that second reason it’ be the only other reason yeah and that and that is we’ve used to refer to that I I screwed up and didn’t set up my Sol okay in time sometimes there is that little angle where the SE Ira is still viable so we can use that another thing to think about though is sometime some people might be like Oh I’m the escorp I can’t do the employee but I can do the employer uh what do I do I’m like just do the solo already okay um because we
(21:33) know we can get 2024 or whatever year you’re in taken care of because you set it up within that year let’s go and grab whatever we can last year even if it’s not complete let’s get what we can but now you’ve got the right structure moving forward where you can start maximizing your contributions yeah um I’m going to say this and maybe in summary is that if again this conversation conversation can seem a little overwhelming and so I want to encourage you to set up that fall planning session a fall planning session
(22:02) right now in the summer it could be CR if you’ve if you’ve extended for last year and this is still an option you need a planning session in the next eight weeks immediately if you’ve already filed for 2023 you’re like hey I got to learn this difference between solos and seps that’s cool now you need a fall planning session before year end because you want to be proactive you don’t want to get in some Fixit mood situation you want to nail your W2 in January properly so set up a call with one of our tax lers our links are down
(22:30) below KK lers they’ll build a trifecta plan for you they’ll give you a strategy that’s tailored to you you can express how much you really how much money you’re capable of putting away is your is your spouse in the mix do you want to double down we can do that too do you have kids in the mix Partners there’s so many factors that you you may not even know or out there um that our tax layer in a really affordable consultation can bring all together yeah and um remember there are deadlines to get this stuff done but the quicker you act the more
(23:02) money you can get in and if there’s any takeaway here where you’re like I got confused in that there were so many calculations and numbers you guys throughout me I’m driving in the car running on my treadmill here’s the answer do an escorp and have a solo K if you want the dumb down answer at the end of the day my what’s our recommendation to you as tax lawyers do an escorp and have a Sol okay and I would recommend for those of you that are not experts in this which which is almost 9 99.
(23:30) 9% because these are complicated things do the full service 401K we have a full service 401k plan that’s a th000 bucks approximately with one of the lawyers at the office they’re going to go through your situation give you all the advice for this year and next put you on a plan that and a journey that is understandable there are we do have a DIY in a sense docs only over at directed Ira but you’re not going to get any advice there because that that’s something a lawyer needs to walk you through through so if you want to do the
(24:00) DIY go to directed Ira there’s places out there on the web that’ll do it for free because they want to just invest your money they know they’re going to make more off of you and fee us down the road so be careful of those and all you can do is brokerage product yeah totally so um do the full service it’ll be well worth it it’s a tax write off um and business expense business expense it’s it’s good stuff so all right everybody thanks for listening in today to the directed Ira podcast see you next time.