Is $50k in business income enough to consider hiring a pension specialist?

Question

I am currently a full time software developer, and have a side business done under my own LLC (S corp).

For the sake of having concrete numbers, lets say I make $100,000 through my full time job, and $50,000 profit through my business, all before tax.

My goal is to stuff as much money into delayed tax investment vehicles.

With my employment income, I can do this by maximizing my 401k contribution every year. For 2019 that is $19,000. Simple enough.

Now I'm in a spot where I want to invest my business income into something. I heard pensions is a good way of doing that since I can put in a significant amount of money into it (based on income, age, etc). Is there a ball park number I should be hitting before I consider hiring someone? I heard the fees are pretty nuts, like $5k a year or something just to have a pension guy. Is $50k in business income enough to start looking for a pension guy?

Also, does having that $100k in employment income affect my potential decision to enroll at all? Or is it completely independent of it?

Answer 1

Now I'm in a spot where I want to invest my business income into something.

This is quite easy. You can open a SEP IRA for your self-employment income. SEP stands for "simplified employee pension" though in practice it seems more like a variant of a 401k than what is traditionally considered a pension.

The best part is that your day job doesn't limit what you can put into your SEP. From your self-employment income, you can contribute 25% of business profit up to a maximum amount (which is $56k for 2019). See this Motley Fool article for more details.

You don't need to hire anyone to set up a SEP IRA. You can set up an SEP IRA yourself with minimal if any fees. I have one set up at Fidelity.

You said that your LLC is an S-Corp and that makes it more complicated to figure out your business profit. Most people set up S-corps to pay themselves a salary to reduce their self-employment tax. There is a tradeoff between reducing tax and maxing out your SEP IRA contributions. SEP IRA contributions are from business profit which are reduced by paying yourself a salary.

Let me give two examples:

1. $50k is paid out entirely as dividends. You need to pay self-employment tax on the full $50k but you can also contribute 25% of $50k to your SEP.
2. $40k is paid out as salary and $10k as dividends. You need to pay self-employment tax on only $10k but you can also only contribute 25% of $10k to your SEP.

Contributing to your SEP reduces your taxable income so the first option is likely a better alternative, and it also simplifies the bookkeeping of your LLC.

Note that I've glossed over some details so you'll need to read up on this in more detail before taking action. In particular, the amount you can contribute to a SEP isn't exactly 25% for people who are self-employed as the percentage is reduced by self-employment tax.