Q: I’m employed full time in a sales position. My employer has decided not to offer a 401K anymore, so I’m trying to decide where and how to continue my long term savings. In addition, I DJ on the weekends as a 1099 sole proprietorship. My income can fluctuate between $80K – 100K a year. I’ll be 29 in December, and I’m trying to decide what to do with my short term savings as well. I have $15K put away as cash for emergencies, but I need to figure out where to put my other money both long and short term. I’m also trying to reduce my tax burden as much as possible. I’m not too interested in purchasing a house, as I feel the costs of home ownership tend to outweigh or wash the interest write off on a tax return. Do I qualify for a SEP IRA? Maybe I should start a Roth? Maybe buy mutual funds and individual stocks? I’m thinking 10% of my income goes in to my long-term savings, then maybe 5-10% could go into short term depending on fluctuating income/commissions. Any advice you could offer would be great.
A: Given your situation, opening a SEP IRA could be a good option for you. A few comments…
1) If your company terminated their 401k, you should be able to rollover your balance to a SEP IRA.
2) Because you are self employed, you can contribute the following amount annually to a SEP: up to 25% of your earned (DJ) income. Your earned income (see IRS Publication 560) is your net business profit derived from your business, reduced by deductions for your self employment tax and contributions to your SEP.
3) If you had already made contributions to your employer’s 401k this year, your total contribution to your SEP and 401k cannot exceed $52,000.
Here is a link to IRS Publication 560: https://www.irs.gov/pub/irs-pdf/p560.pdf#page15
