Newbie who needs help - SEP (self employment pension)

[sesquiterpene]

I’ve been working for myself for about a year now and my accountant recommended that I start a SEP as it supposedly will help reduce my taxes.

I am meeting with someone to discuss setting one up but not really sure a) what to ask b) what’s a reasonable rate for someone to ‘manage’ it for me c) any pros / cons to having one that I should be aware of (example if I need funds there is a penalty for removing before x age).

Thank you for any and all insights.

 

[haniaamir0]

@sesquiterpene Reducing your taxes is not always the best choice. You want to think about when you want to pay taxes. For example, the classic debate between Roth and Traditional is a debate about paying taxes now or later.

Based on your comments, if you are focusing on paying down your debt, keep working on that plan. Adding a SEP may not help you on that goal.

What you are looking for is an Advice-Only, Fee-Only, Fiduciary, CERTIFIED FINANCIAL PLANNER™. Advice-Only means you pay them for their time (either hourly or on a retainer basis) rather than a percent of your assets (an AUM fee). Check out https://xyplanningnetwork.com or https://napfa.org or https://feeonlynetwork.com

 

[sesquiterpene]

@haniaamir0 Thank you for clarifying this for me

 

[normp]

@sesquiterpene You can always do a Roth IRA. Tax free withdrawals at retirement.

 

[sesquiterpene]

@normp I have one but haven’t been able to contribute to it due to debt. Not sure which is the better choice - the guy who runs that also suggests SEP

 

[jess]

@sesquiterpene You can contribute up to 20% of your pretax income up to 61k in 2022. It is deductible from your gross 1099 income. You can open a vanguard SEP account easily and just invest in passive low cost index funds instead of paying management fees.

I believe there is a penalty for early withdrawal just like any other retirement account (tax+10% I think), but it grows tax deferred until retirement.

 

[sesquiterpene]

@jess Thank you !

 

[hopefaith]

@sesquiterpene Related question: If you work a full time job for someone else but also have a small business on the side, can you open a SEP as well as contribute to the main employer based 401(k) and your IRA? Or is it a "one or the other" deal?

 

[kpdavis2000]

@hopefaith Yes you can contribute to both. But note, you can only contribute up to 25% of your self employed income for that tax year.

 

[hopefaith]

@kpdavis2000 Interesting. Thank you!

 

[whitceegee]

@sesquiterpene Full service advisor around 1% is reasonable more than 1.25% is high.

Ask what securities licenses and designations the advisor hold.

Look the advisor up in brokercheck to see if he or she has any previous customer disputes.

Early withdrawal from a Sep if your under 59.5 comes with a 10% penalty ad well as ordinary income tax on the withdrawal

I’d also ask your account about next year looking into a solo 401k as that would allow both Roth and pretax. Sounds like you accountant wants to use the sep to save taxes today, solo 401k could offer you both options, but it is to late to establish one for last years taxes.

 

[sesquiterpene]

@whitceegee Good to know, thank you!

 

[kpdavis2000]

@sesquiterpene Psst. I would spend some time learning a bit and then manage these accounts yourself. It’s really simple stuff, you don’t need people taking your money.