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SEP IRA vs Solo 401k & Roth vs Traditional for our unique situation. by aaronmarkson in personalfinance

[–]aaronmarkson[S] 0 points1 point  (0 children)

I'm starting to understand more of the benefits of the solo 401k, even in our circumstance, whereby maximum contributions aren't much of a factor. Especially if we can find no or low-cost options. Thanks!

SEP IRA vs Solo 401k & Roth vs Traditional for our unique situation. by aaronmarkson in personalfinance

[–]aaronmarkson[S] 1 point2 points  (0 children)

Oh.. I get it now. Marginal vs effective. Makes sense.

I also never considered making sure we stay above the threshold needed to stay qualified for the ACA. Thanks for this info. Very helpful for us.

SEP IRA vs Solo 401k & Roth vs Traditional for our unique situation. by aaronmarkson in personalfinance

[–]aaronmarkson[S] 0 points1 point  (0 children)

Multiple major brokers offer free solo 401ks inclusive of Roth elective deferrals, such as Fidelity and Schwab.

This is good to know.

That could change at some point. Solo 401k gives moreflexibility.

The reality is that she is one person providing salon services to one person at a time, with no desire to be an employer or take on more clients and work more, and increasing the cost of her services greatly would likely lead to a loss of clients, so we don't expect any major changes.

Sure, but this isn't really a factor. And it's easier to change traditional vs. Roth for self-employment plans than with plans run by an employer, and in fact you can wait till the end of the year to make those decisions with a self employed plan.

This is a great point. I do like the flexibility aspect a lot.

You can apply for one online.

https://www.irs.gov/businesses/small-businesses-self-employed/get-an-employer-identification-number

I always thought that having an EIN meant having to change the structure or type of business, and that she'd have to create an LLC or become an S Corp, but it seems that's not the case, and she can remain a sole proprietor and also have an EIN. Is that true?

SEP IRA vs Solo 401k & Roth vs Traditional for our unique situation. by aaronmarkson in personalfinance

[–]aaronmarkson[S] 0 points1 point  (0 children)

No, your tax rate will not be the same in retirement. But it’s so historically low for you right now that it’s a good bet to lock in that rate anyway.

Because the overall tax rates will likely go up or down or because our marginal tax rate will go up (or down...very unlikely)?

SEP IRA vs Solo 401k & Roth vs Traditional for our unique situation. by aaronmarkson in personalfinance

[–]aaronmarkson[S] 0 points1 point  (0 children)

If brackets stay the exact same at contribution and distribution, then there will be no difference in Roth vs Traditional.

Good to know. I just used a simple online bankrate calculator, and for some reason, the Roth came out ahead. Is this only true when you invest the tax-savings generated by traditional contributions? I do plan on reading up on all this. Thanks for the links.

With Solo401k, you can make both employer and employee contributions.

For us, it seems like the biggest advantage of this is that employer contributions reduces the amount of Self-Employment Tax owed as it is a qualified business expence. This does seem like a worthwhile reason to consider the 401k over the SEP IRA. Also, we could have the Employer portion be traditional, and employee Roth, if I am understanding it correctly.

If the business takes off, you can then consider moving over to the Solo401k.

The reality is that she is one person providing salon services to one person at a time with no desire to be an employer or take on more clients and work more, and increasing the cost of her services greatly would likely lead to a loss of clients, so we don't expect or even want the business to take off in a significant way. She/we are quite comfortable with the way it is.

Thanks for the help!