Creating a Pension for Self Employed?

[infoseeker]

I am a sole prop i dont have a corporation setup. What would be the advantages of me setting up a corporation as far as tax benefits and pension vs a sole prop?

I take it you have low expectations of his future... lol


He said his Net income. So I was assuming he meant his AGI.
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Infoseeker,

How is your business set up? LLC? S-Corp? C-Corp?

This should be the third question asked in this scenario before anyone can make a decent recommendation.

Exactly how much per year are you looking to contribute? (fourth question)
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To add to this; the Solo401k has advantages that the SEP or SIMPLE does not have.

- It is fully protected from creditors in all 50 states. IRAs are subject to state by state limitations.

- It can grow with you as you earn more since it has higher limitations on contributions.

If you compare a Solo401K to a SEP using Fidelitys calculator, a 52 year old with a corporation making $100k per year can contribute $10k to the SEP, but $32,000 to the Solo401k. (And that is not including a profit sharing plan either.)

- It can give you both a traditional pre-tax account as well as a ROTH account, all in one plan.

- 401Ks often have lower expense ratios for the funds inside them when compared to the funds retail counterpart.

- If you go with an "un-bundled plan" (meaning a TPA does the admin for it, and you have full control of the plan docs), then you can add annuities or even cash value life insurance to it.


On the flip side the SEP will give you every choice under the sun as far as investment choices go. But there are plenty of good ones on 401k platforms.


More info on how much you plan to be able to contribute each year would really dictate a suggestion.

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I would be able to contribute about 30-50k per year



future... lol


He said his Net income. So I was assuming he meant his AGI.
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Infoseeker,

How is your business set up? LLC? S-Corp? C-Corp?

This should be the third question asked in this scenario before anyone can make a decent recommendation.

Exactly how much per year are you looking to contribute? (fourth question)
- - - - - - - - - - - - - - - - - -
To add to this; the Solo401k has advantages that the SEP or SIMPLE does not have.

- It is fully protected from creditors in all 50 states. IRAs are subject to state by state limitations.

- It can grow with you as you earn more since it has higher limitations on contributions.

If you compare a Solo401K to a SEP using Fidelitys calculator, a 52 year old with a corporation making $100k per year can contribute $10k to the SEP, but $32,000 to the Solo401k. (And that is not including a profit sharing plan either.)

- It can give you both a traditional pre-tax account as well as a ROTH account, all in one plan.

- 401Ks often have lower expense ratios for the funds inside them when compared to the funds retail counterpart.

- If you go with an "un-bundled plan" (meaning a TPA does the admin for it, and you have full control of the plan docs), then you can add annuities or even cash value life insurance to it.


On the flip side the SEP will give you every choice under the sun as far as investment choices go. But there are plenty of good ones on 401k platforms.


More info on how much you plan to be able to contribute each year would really dictate a suggestion.[/quote]

 

[Justin Bilyj]

This is a great thread. Scagnt nice line of questioning. How does the solo401 have both roth and normal options within it?

 

[scagnt83]

SEP contributions are 25% or income or max 50k (2012).

It depends on how the business is set up and taxed.

If they file as a sole proprieter then they are limited to 20% of Net Self Employed Business Profits.
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SOLO you must file DOL forms.

Only on plans over $250k.
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expenses of SEP vs SOLO is not relevant as they are types of accounts, 401k platforms have same options as SEP when it comes to investments.

Technically this is true.
Some 401k plans are able to have the same options as a SEP (meaning most any retail fund or investment).

But it is important to note that most do not.

What you are talking about is an "Open Architecture" 401k platform.
And while they are gaining in popularity, the majority of plans out there are not Open Architecture plans.

Most of the main players in that market do not cater to start up plans. There might be some good options out there for an Open Architecture start up, but Im not familiar with them.


Yes its true that you can go the retail route. And you can find some people/institutions that will act as Trustee and let you pick whatever funds you want. But unless the Named Fiduciary is an investment advisor then that is not an advisable route to take.


What the OP could do though, since he is an agent, is sell himself an annuity and the IC will act as Trustee. Then he just has the expense of $300 or so for a TPA.



But, most plans, especially Solo start ups, are on a Group Annuity or Brokerage platform; and use equity funds, not annuities. (Think Fidelity, Principle, Mutual of Omaha, Guardian, Vanguard)
And most of them are "Bundled" meaning that the Trustee handles the Administration along with handling the assets.
For an Unbundled Plan using a TPA it would cost around $300 - $600 per year for most Solo Plans.
Many Bundled Plans will roll up the admin cost with the plans overall expense ratio, or discount admin.


Investment Fees-
For an Open Architecture plan, yes, the investment fees will be the same as a SEP.

For a Group Annuity or Brokerage Platform that is not the case.
They have pre-set investment lineups to use with their plans. And the funds within them often have lower expense ratios than their retail counterparts. This is because the Trustee is buying these funds in great volumes, and are able to leverage that volume. Think about how many shares from American Funds that Fidelity buys for 401k plans each year.....
Most Investment Lineups on these plans are under 80bps

Im not saying that all are that way. But many are.
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This is a great thread. Scagnt nice line of questioning. How does the solo401 have both roth and normal options within it?

A "ROTH 401k" is really just a traditional pre-tax 401k that has a separate option of a ROTH account.

So there is no standalone ROTH 401k. You add the option of a ROTH account to an existing 401k by amending the Plan Documents.

So when an employee chooses their scheduled contributions, they can choose what % goes to the ROTH account, and what % goes to the traditional pre-tax account.
Their statements will show two separate accounts.

Also, all employer contributions are required to be on a pre-tax basis. So even if an employee elects 100% ROTH, if there is a match on the plan, they will have a pre-tax account as well.
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I am a sole prop i dont have a corporation setup. What would be the advantages of me setting up a corporation as far as tax benefits and pension vs a sole prop?

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I would be able to contribute about 30-50k per year

Check out this thread for some info on s-corps vs. filing as a Sole Proprietor.


Since you are a Sole Proprietor, you would be limited to 20% of Net Self Employed Business Profits in a SEP.


The Solo401k sounds like the best bet based on contribution limits.