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    3 Replies Latest reply on Aug 12, 2008 12:08 PM by Bridge

    SEP IRA or individual 401K

    bmanbman Newbie

      Hi,
      I have recently started a single member LLC and I'm expecting around 60k/per annum as an income from my second job. Since I do have another full time job I don't have to use this 60k for anything. But as I understand even if I don't use this money for payroll still I have to pay Self employment tax (15.3%) for the total income. To avoid this I'm thinking about SEP IRA or individual 401K. The problem is that I don't have any intension to keep this money in SEP IRA or 401K until my retirement age (79 years). I might take this money out after 5-6 years. If I do so I might end up with paying tax +10% penalty. So either way I'm kind of stuck. Is there another way to handle this situation? Please advice me the best option.

      Thanks.
        • Re: SEP IRA or individual 401K
          wealthoffice Newbie
          Well you should never put away funds interned for retirement if you anticipate pulling them out soon after (5-6 years).

          From a legal point of view a 401k is considered qualified which means that the money is hard to get by creditors and a SEP is a super IRA, and has little protection.

          The 401k allows for a loan, whereas the SEP does not. So perhaps if you wanted to put away the money and then later get half the money out using a loan, then maybe that would be warranted.

          Otherwise, you should keep the amount in a tax friendly account that easily accessable.

          Also, you need to see if your current job offers a 401k, if they do then there may be issues.

          Good luck,

          Aaron
          • Re: SEP IRA or individual 401K
            wealthoffice Newbie
            Well you should never put away funds interned for retirement if you anticipate pulling them out soon after (5-6 years).

            From a legal point of view a 401k is considered qualified which means that the money is hard to get by creditors and a SEP is a super IRA, and has little protection.

            The 401k allows for a loan, whereas the SEP does not. So perhaps if you wanted to put away the money and then later get half the money out using a loan, then maybe that would be warranted.

            Otherwise, you should keep the amount in a tax friendly account that easily accessable.

            Also, you need to see if your current job offers a 401k, if they do then there may be issues.

            Good luck,

            Aaron
            • Re: SEP IRA or individual 401K
              Bridge Navigator
              You potentially do not have to pay self employment tax on the entire income - only the income reported as wages.

              If you are a single member LLC, the IRS will tax you as a sole proprietor unless you file the elections/forms to be taxed as a corp. and then an "S" corp.
              Being taxed as an S corp will allow you to classify some of your income as wages and some as "profit" of the corp. which will be taxed at your personal income tax rate.

              You might benefit from the advice of an accountant who could address your specific situation and give guidence as to what % to report as wages/profit.

              Bets of luck,
              Greg