On Sat, 18 Aug 2007 15:37:39 -0500, joetaxpayer <joetaxpayer[at]nospam.comwrote:

- quote -

I missed that. :-| Sorry.
--ron

Will Trice wrote:

[...]
- quote -

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

Mark Bole wrote:

- quote -

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

Will Trice wrote:

- quote -

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

Ron Rosenfeld wrote:

- quote -


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.

On Sat, 18 Aug 2007 11:41:26 -0500, joetaxpayer <joetaxpayer[at]nospam.comwrote:

- quote -

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

Mark Freeland wrote:

- quote -

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
401(k) likely has lower fees. (My 529 has a .5% fee for S&P index, vs
the .10% for non 529 fund).
JOE

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:8badncq74IBjvVrbnZ2dnUVZ_qWtnZ2d[at]comcast.com...
- quote -

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).
http://personal.fidelity.com/product...sr?refpr=sb003

(The page shows 25%, which is the same as the 20% Joe described, because of
the way it is computed.)

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".

- quote -

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
401(k)).
http://www.troweprice.com/common/ind...n&rfpgid=10080

- quote -

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
BnetOnewsX[at]sbcglobal.net

Will Trice wrote:
- quote -

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 www.SBLI.com it's not available in IL, I just use that site
as it allows a quick quote with no ned to enter personal info. BTW -
that was for 20 year term, by then he'll either be retired, or will have
enough assetts that the insurance won't be needed, not for that much,
anyway)

JOE

joetaxpayer wrote:

- quote -

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

On Sat, 18 Aug 2007 05:06:40 -0500, Shhhh <Shhhhh22[at]gmail.com> wrote:

- quote -


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

On Sat, 18 Aug 2007 05:06:40 -0500, Shhhh <Shhhhh22[at]gmail.com> wrote:

- quote -


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

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.
http://personal.fidelity.com/product...lus.shtml.cvsr
is an AMEX card tied to Fidelity. It offers 1.5% back on all purchases,
deposited right to a 529 account. No annual fee. If you don't have some
other reward card you love, this can save you some money, depending how
much you can run through it.

I have another thought you may consider;
Drumroll, please. SEP IRA. For a selfemployed person, a SEP IRA allows
you to save 20% of gross income (it's 20 of gross, since 25% of the net
80% is 20%, the rule is written pretty silly). This would let you save
up to $20K pretax.

That might appeal to you, or not. See
http://www.irs.gov/retirement/articl...1419,00.html#1 or google
on SEP IRA. At the risk of being accused of focusing too much on taxes,
I suggest you peek at http://www.fairmark.com/refrence/index.htm for an
easy way to see your tax bracket. Basically, in 2007, taxable income
(1040 line 43) over $63,700 is at 25% for married, filing joint. You
just don't want to save yourself into the 15% bracket. You'd have a high
risk of it being taxed higher on withdrawal. Lastly, any year you have a
drop in income for whatever reason is an opportunity to convert some of
that to a Roth IRA, and pay the 15% tax.

Of course, I've not asked; what are your retirement goals? Asset
allocation links from Elle
http://home.earthlink.net/~elle_navorski/id8.html can't hurt if you are
interested.

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
www.blog.joetaxpayer.com

Hello all,

My wife and I have some big changes comming our way in the next 9
months or so (WOO HOO I'm gonna be a dad!) and I've been reviewing our
financial situation and budget, and would really love any and all
thoughts you may have...

Background.

- Me: 26 Yrs. old
- Wife: 25 Yrs. old
- I'm self employed and bring in $1950 a week;
- Wife is a teacher and brings in roughtly $1300 a month (don't even
get me started on how grossly underpaid teachers are); or roughly $300
a week
- Being selfemployed I have no 401K
- Wife contributes 10% of every paycheck to 401K
- After taxes and 10% 401K is taken out of wifes check... we save in
regular savings account an additional 10% per check.

- My $1950 a week is broken down like this...
- $410.07 is set aside for taxes
- $239.93 goes into a regular savings account.
- That leaves $1300 a week for everything else.

- Just bought a house don't have best credit... 30YR mortgage... $1800
a month
- Two credit cards $800 balance combined
- $400 a month goes to Trowe Price into 4 mutal funds $100 each
- $333.33 a month goes into my IRA
- $333.33 a month goes into wife IRA
- $2240 a month goes into regular DRIP stocks investments through
sharebuilder.com

- Need to start saving for baby 529 plan is where I'm leaning, don't
know weather I should perhaps cut out the Trowe Price investments and
use that, or just come up with the investment $ out of whats left from
our disposable income. (I live in illinois, if that makes any
difference)

- NOTE: all these investments come out of the $1300 a week.

So that's basically it. Any other questions or clarifications you
folks need, I'll be glad to reply.
Thank you all, looking forward to hearing your thoughts, opinions, and
suggestions.