So I recently incorporated my investments into an LLC with an S-Corp election.
Having recently FIRE’d, I’m now on an endeavor to pursue investments and real estate to continue to grow my wealth. And I figured the most efficient way to do that is through an LLC instead of putting my own personal assets at risk.
An LLC/S-Corp gives me the opportunity to continue to contribute to a tax-deferred retirement account. Since I’m only 35, I could take advantage of this tax-deferred growth over the next 30 years.
And since I no longer have a job with a 401(k) plan, I have to opt for creating my own 401(k) plan through an LLC.
Why didn’t I choose a SEP IRA? Here are the reasons:
SEP IRA Rules
A SEP is a Simplified Employee Pension. The following are the main points of a SEP IRA:
- Only employers contribute to the plan. There is no employee contribution.
- Maximum Contribution Limit of $58,000 or 25% of your annual compensation, whichever is less. If you make $100,000 per year, then you can only contribute $25,000. In order to max out your SEP, your annual compensation would have to be $228,000.
Solo 401(k) Rules
- Enployees contribute up to a maximum of $19,500 in 2021. Similar to a regular 401(k) at any company.
- Employers can contribute up to the remaining $38,500 or 25% of your annual compensation, whichever is less. This combined total between the employer and employee contribution equals the maximum $58,000 you can contribute per year.
What makes the Solo 401(k) better is that in order to max out your $58,000 per year, your annual compensation only has to be $154,000 instead of $228,000.
This means you’re running payroll less and paying less in FICA, medicare, and payroll taxes.
Additionally, if you’re running a business, this means you can keep more of your cash in your business instead of being forced to pay yourself out just to reap the 401(k) benefits.