Self-Employed? Maximize Tax Deductions and Tax-Free Buying Power

To those who did not read our last piece “How To Invest In Real Estate Completely Tax-Free”, here’s a quick synopsis: You can invest in real estate and other alternative assets COMPLETELY tax-free using a NuView Self-Directed IRA (specifically, a Roth SDIRA). Traditional IRAs come with the benefit of tax-deductible contributions, but you are still required to pay income tax when you take distributions at retirement age. If you want tax-free, you’d want a Roth SDIRA.

But what can be accomplished with a $6,000 contribution limit per year ($7,000 if you’re over the age of 50)? Frankly, the answer is quite a lot. If you’re a seasoned real estate investor with experience using leverage, Real Estate options, or buying debt-leveraged property, you may be able to accomplish quite a bit with those low contribution limits.

However, if you happen to be self-employed (which many real estate investors are), you qualify for a handful of Employer Plans that have much higher contribution limits but are only available if you have self-employed earned income.

Today, we are going to focus on the SEP IRA and the Solo401k, both provided by NuView Trust Company.

SEP IRA stands for Simplified Employee Pension IRA. To qualify for this type of IRA, you simply need to have self-employed earned income. In stark contrast to the Traditional and Roth IRA, you can contribute up to 25% of your self-employed income if it’s W-2 income, or approximately 20% of your 1099 income, up to a total limit of $58,000.

This massive contribution is tax-deductible, however, it does come with the stipulation that you contribute the same percentage of earned income to your employees’ SEP IRAs (which would be established at the same time as your own SEP IRA). The percentage that you contributed to your SEP IRA would be applied to the employees’ earned income during the year.

For example, if you contributed 25% of your earned income to your SEP IRA, you would also be required to contribute 25% of their earned income to their SEP IRA at the same time. If “massive tax-deduction” makes your ears perk up, then the SEP IRA may be for you. Keep in mind that the SEP IRA behaves like a Traditional IRA. Tax-deductible contributions and tax-deferred growth.

The Solo401k has different qualifications, comes with different perks, and grows differently depending on how you want to structure the plan.

It is a 401k plan that you adopt for your self-employed business. This plan comes with the same contribution limits as the SEP IRA. Different from the SEP IRA, however, is that you can make contributions as the employer AND as the employee (since you wear both hats).

The $58,000 total contribution limit still applies, but $19,500 of that contribution can be made as Roth employee contributions. That bucket of money grows completely TAX-FREE. The remaining difference between that $19,500 and the total limit of $58,000 (or 25% of W2 income/~20% of 1099 income) can be contributed as the employer and you can take a tax deduction for that amount if desired.

If you’d rather have tax-free growth within the entire plan (including the employer contribution), you can decline to take the tax deduction, and do an in-plan Roth Conversion to max out your tax-free bucket of money.

Furthermore, if your Solo401k plan documents allow for it, you can also do a “Mega Backdoor Roth”, which allows you to contribute the entire $58,000 regardless of earned income percentages.

Both the SEP IRA and the Solo401k provided by NuView Trust Company can be self-directed into alternative investments, like real estate.

Alex Sylvia, IRA Specialist