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This is a re-post of a question I asked at II, they directed me here: Hope someone can help!

I've never got a satisfactory answer to the following series of questions. Hopefully someone can come up with a better, more exact and precise answer to the following situation:

I'm 29, I make about 100k/year before taxes (Varies since I own my own business, but its held firm for the last 5 years around there).

So my tax bracket is high-ish. For simplicity sake lets use two potential investment models, we're going to ignore a 401k Solo account and use a SEP vs. ROTH.

What's better for retirement? I can invest a tad over 10,000 typically in SEP (Maxed out) then pour my tax savings into a traditional investing account with MLPs and other tax advantaged items (or at the very least, foreign stocks that don't fit the sep) or invest 5,000 in a ROTH, pay the taxes on it, and put the remainder into a traditional investing account.

And of course, the final question is: Does anyone know for sure if a ROTH style 401k exists for a sole proprietor? I don't think it does.

Then the final question is: How much does this answer change if I go to a solo 401k and put 20,000/year+ into it (And on top of that, do you still have full control of a solo 401k? I don't really get how it works, but since the contribution is higher what is the disadvantage of it vs. a SEP?)

The reason I ask this here is I expect my avg dividend on these folios to be in the realm of 4%, I know that makes an impact on taxes (especially if it increases to 20% next year).

Ok that was probably less clear than it could have been. Hope someone can help clarify this for me!
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I'm 29, I make about 100k/year before taxes (Varies since I own my own business, but its held firm for the last 5 years around there).

So my tax bracket is high-ish. For simplicity sake lets use two potential investment models, we're going to ignore a 401k Solo account and use a SEP vs. ROTH.


I'm not sure from your post whether you know that you can do both. Because you're self-employed you can do a SEP or a 401(k). Because you have "taxable compensation" you can also contribute $5,000 to a Roth IRA.

What's better for retirement? I can invest a tad over 10,000 typically in SEP (Maxed out) then pour my tax savings into a traditional investing account with MLPs and other tax advantaged items (or at the very least, foreign stocks that don't fit the sep) or invest 5,000 in a ROTH, pay the taxes on it, and put the remainder into a traditional investing account.

Well I think that answers my question posed above. However, your statement "pay the taxes on it" leads me to think you're double-counting the current tax burden. Starting with your Schedule C bottom line you subtract your adjustment for 1/2 of the Self-Employment Tax and your SEP contribution. What's left is part of your Adjusted Gross Income, and you pay taxes on that (after deducting itemized or standard deduction and personal exemption). Making a Roth contribution doesn't change your tax.

If you have investible cash after making your SEP contribution I would definitely go the Roth route up to your $5,000 limit. If you still have investible cash after that, then move on to a vanilla taxable investment account.

And of course, the final question is: Does anyone know for sure if a ROTH style 401k exists for a sole proprietor? I don't think it does.

There's no reason in tax law why it wouldn't. You might want to check out on the 401(k) board.

Then the final question is: How much does this answer change if I go to a solo 401k and put 20,000/year+ into it (And on top of that, do you still have full control of a solo 401k? I don't really get how it works, but since the contribution is higher what is the disadvantage of it vs. a SEP?)

Another good question for the 401(k) board. You do have higher limits, but I think usually the expenses are higher also. (There really are no expenses involved with a SEP and no paperwork unless you have employees.)

Phil
Rule Your Retirement Home Fool
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You are right, I thought sep and Roth contributions were mutually exclusive (or more important one counted against the other).

I was aware of the calculation, but I guess I was unclear. I was suggesting if you had exactly 10,000 to invest after paying you end of year tax you could put it in a sep, decreasing your tax burden by 10,000 and with the 30% or so saved place that extra 3,000 into investments. Neither here nor there though, you have answered my questions and in so doing created more questions! Lol I am off to the retirement board!
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