2013 was the first full year that I was self employed and I did well enough to continue saving for full retirement. Before I calculated that we would need about $500/month from my online business to make ends meet without dipping into my online solo 401k. If I make anything more than that, I can contribute a tax advantaged retirement account to reduce our tax liability. Taxes take such a big bite out of your income and you should try to reduce your tax as much as possible.
Here are the main options for the self employed.
- SEP IRA. The employer (self) can contribute up to 25% of your income to this account. The cap was $51,000 in 2013 and $52,000 for 2014.
- SIMPLE IRA. The employee (self) can contribute up to $12,000 in 2013. The employer (self) can match up to 3% of the employee’s compensation.
- Individual 401k aka solo 401k. This one is only for solopreneurs with no employee (or just the spouse.) The employee (self) can contribute up to $17,500, the standard 401(k) limit. In addition, the employer (self) can contribute up to 25% of the earned income. The total limit is $51,000 in 2013 and $52,000 in 2014. You can add another $5,500 if you’re at least 50.
In 2013, I made about $33,000 and I’m keen to avoid tax as much as possible. If we can reduce our tax liability enough, we can get into the 15% tax bracket and won’t have to pay tax on I plugged $33,000 into the calculator at solo401kcalculator.com and here is the result. The individual 401k enabled me to save more than the other accounts so I went with that.
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At first, this seems a little off to me. For the individual 401k, I thought I should be able to contribute $17,500 plus 25% of $33,000. Well, I should have known it wouldn’t be that simple when it comes to the IRS. Here is what I got from irs.gov.
When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:
- one-half of your self-employment tax, and
- contributions for yourself.
You need to sit down with one of those crazy 21-step worksheets to figure out your maximum contribution.
Anyway, I already plugged my number into and the result is the same. So for 2013, I will contribute $17,500 + $6,000 to make it $23,500. BTW, if you are self employed and have some contractors working for you, then you need to do part of your taxes in early January because you need to send out the 1099-MISC. Yes, it’s tax time already. Yuck!
Vanguard i401k
I decided to go with Vanguard for my individual 401k. Vanguard is a great company and I like their index investing approach for my 401k.
I called Vanguard and set up an appointment with the small business service division. Later on, I talked to Vanguard’s representative for about 30 minutes. He went over what Vanguard is all about and their investing philosophy. They wanted to make sure we are the right fit for each other. For my i401k account, I will be buying and holding index funds, so it’s a good fit. If you trade often, then Vanguard probably isn’t the right choice for you.
2013 was the very first full year that I was self utilized and I did well enough to continue saving for full retirement. Before I left my business task, I determined that we would require about $500/month from my online company to make ends satisfy without dipping into saving. If I make anything more than that, I can contribute a tax advantaged pension to decrease our tax liability. Taxes take such a big bite out of your income and you must aim to lower your tax as much as possible.
Here are the main options for the self employed
SEP Individual Retirement Account. The company (self) can contribute approximately 25 % of your income to this account. The cap was $51,000 in 2013 and $52,000 for 2014.
SIMPLE Individual Retirement Account. The staff member (self) can contribute as much as $12,000 in 2013. The company (self) can match up to 3 % of the staff member’s compensation.
Individual 401k aka solo 401k. This one is just for solopreneurs with no staff member (or simply the spouse.) The worker (self) can contribute up to $17,500, the conventional 401(k) limit. In addition, the employer (self) can contribute approximately 25 % of the earned earnings. The overall limit is $51,000 in 2013 and $52,000 in 2014. You can include another $5,500 if you’re at least 50.
Image may be NSFW.
Clik here to view.
In 2013, I made about $33,000 and I’m eager to prevent tax as much as possible. If we can decrease our tax liability enough, we can get into the 15 % tax bracket and won’t have to pay tax on our dividend income. I plugged $33,000 into the calculator at solo401kcalculator.com and here is the outcome. The individual 401k enabled me to conserve more than the other accounts so I chose that.
vanguard individual 401k i401k solo 401k self utilized.
Initially, this seems a little off to me. For the individual 401k, I believed I ought to have the ability to contribute $17,500 plus 25 % of $33,000. Well, I need to have known it wouldn’t be that easy when it comes to the IRS. Here is exactly what I got from irs.gov.
When figuring the contribution, payment is your “made earnings,” which is defined as net earnings from self-employment after subtracting both:
one-half of your self-employment tax, and
contributions for yourself.
You have to take a seat with one of those crazy 21-step worksheets to figure out your optimum contribution.
Anyhow, I already plugged my number into TurboTax and the result is the same. So for 2013, I will certainly contribute $17,500 + $6,000 making it $23,500. BTW, if you are self utilized and have some professionals working for you, then you need to do part of your taxes in early January since you need to send out the 1099-MISC. Yes, it’s tax time currently. Yuck!
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Vanguard i401k
I chose to opt for Lead for my individual 401k. Lead is a fantastic business and I like their index investing technique for my 401k.
I called Vanguard and established an appointment with the small company service department. Later, I spoke to Lead’s representative for about Thirty Minutes. He reviewed exactly what Lead is all about and their investing approach. They wanted to make sure we are the ideal suitable for each other. For my i401k account, I will certainly be buying and holding index funds, so it’s a good fit. If you trade often, then Vanguard most likely isn’t really the right option for you.
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