Have a SEP-IRA? Read This.
By Peter C. Thoms, CFA
If you contribute to a SEP-IRA, then good for you. You are reducing current-year taxes while building a tax-deferred retirement nest egg. However, if you would like to cut your taxes further and build your nest egg faster by making larger contributions than are permitted with a SEP, then you have two potentially better options:
1. An Individual 401(k)
2. A Defined Benefit Pension Plan
Participating in a sub-optimal plan for your situation will likely cost you several thousand dollars in tax savings per year, so it is important to research your options carefully.
Here are the contribution limits for each option for a 52-year old earning $300,000.
*Both the SEP and Individual 401(k) have 2015 contribution limits of $53,000, but the Individual 401(k) offers a $59,000 limit if client is age 50+ as a “catch-up” provision.
The key difference to understand between the SEP-IRA and Individual 401(k) is that at the same income level, because of the way the calculation is done, a self-employed person can probably contribute significantly more to an Individual 401(k) than to a SEP-IRA and thereby save more in taxes as well.
Another advantage the Individual 401(k) has over SEP-IRAs is that 401(k) account holders are able to take a loan of up to 50% of the value of the 401(k) with a $50,000 maximum. Loans are not permitted from a SEP-IRA.
Very high income clients who would like to make even larger contributions to a tax-deferred retirement plan than are permitted by either a SEP-IRA or Individual 401(k) should consider a Defined Benefit Pension plan, which is the most powerful (but least known) type of retirement plan. As the chart above demonstrates, a DB plan offers much higher contribution potential, but does come with higher administrative responsibilities and costs. (In exchange for tens of thousands of dollars in annual tax savings, however, the extra paperwork is easily worth itÂ…) We have written extensively on DB plans, and you can read a recent article here.
Furthermore, in some cases a 401(k) can actually be combined with a DB plan, yielding still higher tax savings and nest egg-building potential.
Do you have the best retirement plan set up for your circumstances? If you are unsure, give us a call and we’ll go through the options with you. No strings attached.
To learn more about how we manage client portfolios, please visit us at www.orionportfolios.com
Peter C. Thoms, CFA
Orion Capital Management LLC
1330 Orange Ave. Suite 302
Coronado, CA 92118
Tel: 619.435.1701
Email: [email protected]
About the Author:
Peter C. Thoms, CFA, is the founder and managing member of Orion Capital Management LLC, an independent Registered Investment Advisor based in Coronado, California. The firm manages assets for individuals, families, trusts, corporate pension plans and non-profit organizations.
Disclosure:
This document is for informational purposes only. Nothing in this report is to be construed as a specific investment recommendation. This document does not constitute the provision of investment advice, which is only provided by Orion Capital Management LLC under a written investment advisory agreement and only in states in which Orion Capital Management LLC is registered or is exempt from registration requirements. Orion is not a tax advisor and does not provide tax advice. For tax advice individuals should consult their CPA.
