The SEP IRA as a Last Minute Tax Strategy | Mark J Kohler | Tax Tip cpa sales tax llc

If you're watching this video then you're looking for a last minute tax strategy for your tax return. And I know your pain. I myself am always looking for the same and for our clients around the country. Now I'm a CPA attorney, an author, owner of a trust company, speaker around the country and I help clients save taxes, build their wealth and protect it. That's all we do. And I want to share with you what I think is good and bad about the SEP strategy and I want to explain it here. So, so let's dive into it and I think you're going to love it. Alright first, what is it? What does this SEP stand for? Well it stands for simplified employee pension and it's for business owners. So spoiler alert, if you don't have a side hustle, a side gig or a small business, you're not going to be able to take advantage of this. But if you have income in any sort of small business, you can even be an Uber driver and have profit, you could set up a SEP if it makes sense for you. So think of it that way. It's a deduction, much like a 401k or an IRA off your tax return. It grows tax deferred and then someday it comes out and if you wait long enough, no penalty, but you would pay tax. When you pull it out now you could convert it to a Roth down the road. Now some of you, you're already like swimming going what? This is too much. Well hang with me with me. I want to make six points about how you can utilize the SEP if you're a small business owner and how it could be a huge benefit to you on your tax return and down the road building wealth. First point, the 401k is better 90% of the time, if not more and here's why, because you can put away more money and then a percentage of your profit or your salary and minimize your fica, which is your self employment tax, suda, fuda, fica, Social Security, Medicare, you've heard of that? Well as a small business owner you want to keep that low and put as much as you can into retirement and get a write off again, 9 times out of 10 the 401k is going to outperform the SEP. Now I know there's some employee rules and all sorts of little ways to compare that. So I want to encourage you down below I've got another video that compares the SEP to the 401k. So we're going to dive into the SEP. But the first point is I'm going to really try to get you into a 401k with proper proactive planning. But if you didn't have a 401k, you can still take advantage of the SEP and that's why we're talking number two. Here's how it works and it's best I use the whiteboard to explain two ways you might use this. Now for those of you that have watched many of my videos, I like to break things down into operations and assets. And over here you might have an LLC with some rental property or some investments. Okay, we cannot have a SEP or create one or contribute to a SEP out of a passive income investment. Can't do it. So I'm going to put SEP with a little line through it. There we go. Now over here, there's going to be two scenarios where you might use a sep. For those of you that are an LLC or a sole proprietor, there's a different rule than if you are an S corporation. Now if you're an LLC taxed as an S corp, then you're an S corp. You're over here. But you've got to figure out where am I at first? Now we're going to talk about employees in a minute, so hang tight. But when you contribute to a SEP over here, and let's say you're going to have $100,000 of profit with a sole proprietor or an LLC that's just on a schedule C, Charlie, you can only put away approximately 20%. So you could take a $20,000 write off and dump it into a set over here. On your investment side, you get a write off for 20 grand. If you're in an S corp. The beauty is we're going to pay, and I should point this out, you're going to pay FICA on this entire 100 grand, which is going to be $15,000 plus, which is ugly. But in an S corp, if you make the same hundred grand, I might do a salary of 40 grand and a pass through of 60. And you can do 25% of 40 grand. Okay, so 25% means I can put $10,000 in my SEP. You're going to go, well, Mark, this one's better. 20 is bigger than 10. Yeah, but also look at this. On the FICA, we didn't spend $15,000. We only paid $6,000 in FICA in this example. And so this is where the SEP gets really tricky because to get these bigger dollar amounts, you've got to pay a lot more in FICA over here. We saved 12 grand but we only got 10,000 in our SEP. Over here I paid 15,000. Well sorry, we paid $10,000 or $9,000 more in taxes to get 20,000 in deposits. And you can see, well does that make sense? I'd rather you put less in your sep, get a write off, save the taxes. So this would be nine grand in savings and then put that in a backdoor Roth ira. So you can still get some Roth contributions and some SEP contributions and save some taxes. But if you're going to do a sep it you were a S Corp for last year. You have until you filing this tax return to decide how much you want to put in the sep. And so this is why it's kind of a last minute strategy because Here let's use 2020 as an example. I have until September 15th to decide if I want to do this and make the deposit. But I get the write off back in 2019. And it's the same rule here. I have until actually October 15th to decide if I want to do a SEP. Now why one last point here too. You can put up in 2020 up to $57,000 into a SEP, which is huge. But look at how much FICA you'd have to pay to get there. There's a law of diminishing returns. So I want to be really targeted and efficient on how much I want to put in the sep. So what's, why is this not look great? It's because you didn't do the 401k back by December 31st. If I would have had time with my client back in December, I would have said let's do a 401k where I can do up to 19,000 plus 25%. Now I could do 29,000 in a 401k and still pay the same little in FICA. That is why the 401k is freaking awesome. Because I can put so much more away than a SEP and still save on fica. That's the efficiency. But again I'm shooting this video as a last minute tax strategy where if you're filing your taxes now in 2020, you didn't have a plan back in 19. Let's still harvest a good write off. You're going to be able to write off more than a regular ira. And that's why small business owners want will jump. Now that was the longest portion of this video. How do they work? And some dollar amounts and of course you can meet with your accountant, study up and I've got great articles in my blog on this and longer videos in my tax and legal library on my website. The links below. Okay, now I want to hit four more points. That'll go quick, but they're really, really helpful. The next point is called the backdoor SEP ira, which kind of seems weird. Well, let me explain how this works. So back to our example of operations versus assets. Sometimes I have clients that have a W2 over here and they've got their day job and based on their income level or if they're married, they may want to be classified as a real estate professional because they have rental properties. And when they have rental properties, they've got this LLC over here and they might have flow through losses. Or if these LLCs are paid paid off to a big degree, you might be paying taxes on some cash flow over here. The more you pay down the mortgages on rentals, the higher your cash flow and the more potential of some taxes on that cash flow. So we're going to, we're going to go analyze this and create the backdoor sep. So what was the rule? We can't set up a SEP here because you don't have earned income and you're not an employee, which you can't be of your own llc. So what we do is we pay a management fee to a little sole proprietor over here and we pay this management fee to take a write off over here. So let's say we want to spend 40 grand in management fees to yourself, which you would never normally do because we don't want to pay fica. But if your FICA is already maxed out over here, and so the FICA bill is really minor, we can pay this fee over here to a sole proprietorship, maybe take hardly any write offs at all because you're going to maximize your write offs here. And then we drive this 40 grand out, we could generate a $10,000 SEP deduction. Now that could be pretty cool. That could be a great way to backdoor into a SEP write off when the FICA is minimal because you've already maxed it out over here. And so some people are like, man, I want to drive as much as I can into a SEP and self direct it, which is something I'll bring up later. This is a great way to create a backdoor write off. But I want to be careful to not pay too much FICA in the loop and make sure it works for my client. Number four employees, question mark. Right. Some of you have talked to your accountant or been on the web and say, oh well, I have employees, so I can't do a SEP for myself without including my employees, which can get really spendy quickly. That's why again, a 401k, with some proactive planning, you can create what's called a safe harbor 401k and push down the matching for your employees so you can still get a massive benefit with the 401k. Again, our attorneys at our law firm are great at this. I'd have you talk to Kevin Kennedy, the primary attorney in our Office working on 401ks for clients around the country and we keep it affordable. But again, that's for proactive planning moving forward. But let's say you're still trying to find that last minute tax deduction. And, and I had a call like this this very week from a client that said, well, my accountant said I can't do a SEP unless I include my employees. So let's go to the whiteboard and see what the real rules are here. So we go back to our ops and assets and we're going to focus over here on our sole proprietor or our S corp. And so we're going to decide which bucket we're going to play with. And so let's, let's do the plain old sole proprietorship. Okay. And this could be an LLC sole proprietorship. And let's say you've got that 100 grand in profit. Well, I had a client this week that said, well, Mark, I have two full time employees and so I can't do the SEP without including them. And I said, really? How long have these employees been with you? And they said, well, one's been with me about a year, the other one about 18 months. And I said, bam. You only have to include full time employees that have been with you for more than two years. Full time. So once they became full time, the clock started ticking. So for this year, for my client in 2020, we were able to jam out a SEP deduction and make that contribution over here, not include any of the employees for this year. But because one of them was 18 months ago in 2021, that's okay. We kill the SEP, move to the 401k and jam it down and ramp up the 401k. This is why tax attorneys make the big bucks, is because we're saving you 10 times what you're paying us. And we're a tax law firm that has been structured for the small business owner on Main Street. You go to those big law firms in the city, those are for those tax attorneys are working for Wall street, you know, Fortune 1000s or whatever, and they're spendy. We're trying to do this affordably for our clients. So this is blowing your mind. Don't think you're out of the realm of this. This is a restaurant owner, a dentist, a doctor, a plumber, an electrician, a realtor. We love this strategy. So back to the board. First, you can still do the SEP if you had no full time employees in the last two years. And here's the other perk. Part time employees don't count. So when I get on the phone with clients and we're doing some planning, I'm going to focus on number of part time employees versus full time and when they started. And we still may be able to jump into the SEP for this year and then convert it later to a 401k. Number five, the fallback. Well, sometimes I have to be the bearer of bad news. My clients have full time employees, they've been around for a couple years. They didn't talk to any sort of strategist about a 401k last year. They want to do a SEP, but they can't without throwing down some major contributions for their employees. Not that they're bad people, but it can get too expensive. So what can you do? There's really two options. First, just consider a traditional ira. Now if you make too much money, you, you can't contribute to a traditional IRA and get a write off. So that brings into the play the Roth, the backdoor Roth ira, which I'm a huge fan of. So if you can't do the SEP, you're too late for the 401k. You make too much money. I had another client this week call up and say, yeah, my account said I can't do a Roth, I make too much money. So oh my gosh, that's almost malpractice because it is so easy to do what's called a backdoor Roth where you make a non deductible contribution to a traditional and then on day two convert it to a Roth and you can still do this for the prior year up until April 15th. Now if that blew your brain, I've got a video on YouTube just on backdoor Roth IRAs. Get over there to that video by just typing Kohler backdoor Roth and you'll love it. So don't think all is lost. I still want you funding a Roth every year just like Dave Ramsey would tell you to do. And I have some great videos on how to get massive returns on a Roth ira. Because the other kicker in all this is I want you to self direct your SEP. Self direct your 401k or your IRAs or SEP or your Roth and do that in an account where you invest in what you know best and that's called self directing. And you kind of pull your money, part of it or good portion of it, you choose, into a trust company that allows you to self direct and invest it and you get it out of Wall Street. There's no penalty, there's no, there's no tax. Again, search YouTube. Kohler self directing. You'll love it. Finally, number six, what do we do next year? We knew we kind of screwed up. I had to do the SEP and it's not the perfect fit and my business is growing. I may have employees coming down the pipe. What do we do next year? So back to our diagram. You're over here with a sole prop. LLC or an S corp or an LLC taxed as an S corporation. LSC taxed as an S corp. And so what we do is we do our SEP this year, however we're going to do it and we take whatever write off we can get. Anything's better than something's better than nothing. So we get rolling here. Now next year what we do is we adopt a 401k and maybe a solo 401k because you don't have any full time employees. And this 401k can now be self directed by you, create LLCs and businesses and invest it, even do a real estate, whatever you want with this 401k, get better rates of returns than an ETF or a mutual fund and this SEP rolls into the 401. No penalties, no tax and you can just roll it up into this 401 or you can even roll it out to an IRA or roll it out to an IRA and convert to a Roth. So you have all these choices to help you use that SEP that you had to use at the last minute and get a write off. Now we can take it and invest it and move it around with no penalties and no tax. Well, there you go. Now you know so much more about the sep. In order to be the captain of your own ship. Now you can bring this up with your tax advisor or if you're doing your own tax return, do some additional study and make sure you nail it. Get a write off now and maybe use that SEP as a last minute write off. Hope this was helpful. Also please know every week I'm shooting new videos to help you save taxes, protect your wealth as a lawyer and also help you build your business and wealth as we help guide our clients through all sorts of cool strategies that bring it all together. So please press on the subscribe button below, hit the bell icon so every time I shoot a video you get a little ping and I know it'll save you tons. And share this video, please with any of your friends or family or partners to help them also in their quest to live the American Dream. Thanks so much.