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 an owner of a trust company i 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 this SEP
strategy and I want to explain it here so let's dive into it and I think you're
gonna love it
all right first what is it what does this Sepp 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 household a side gig or a small business you're not gonna 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 set 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 swim and go what
this is too much we'll hang with me hang 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 ninety percent 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 food if I K 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 it right off again nine times out of ten the 401 K 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 this SEP to the 401 K so we're gonna dive into the
SEP but the first point is I'm gonna really try to get you into a 401 K with
proper proactive planning but if you didn't have a 401 K 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 they've watched many of my videos I'd 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 gonna put a set with a little line through it there we go now
over here there's going to be two scenarios where you might use a set 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 gonna have a
hundred thousand dollars 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 twenty thousand dollar write off and dump it into a set over here on your
investment side you get a write-off for twenty grand if you're in an S corp the
beauty is we're gonna pay and I should point this out you're gonna pay FICA on
this entire hundred grand which is going to be fifteen thousand dollars 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 sixty and you can do 25 percent of 40
grand okay so 25 percent means I can put ten thousand dollars in my set and
you're gonna go we'll mark this one's better twenty is bigger than ten yeah
but also look at this on the FICA we didn't spend fifteen thousand dollars we
only paid $6,000 in FICA in this example and so this is where the Sepp 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 ten thousand in
our SEP over here I paid 15,000 well sorry we paid ten thousand dollars or
nine thousand dollars more in taxes to get twenty thousand in deposits and you
can see well does that make sense I'd rather you put less in your Sepp get a
write-off the taxes so this would be 9 grand and
savings and then put that in a back door Roth IRA so you can still get some Roth
contributions and subset contributions that saved him taxes but if you're gonna
do a set and you were a escort for last year
you haven't tell 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 in one last point here - you can put up in
2020 up to fifty seven thousand dollars into a set 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 set so what's why is this not look great it's because
you didn't do the 401k backed 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 and FICA that is why the 401k is freakin awesome because I can put so
much more away then 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 nineteen let's still harvest a
good write-off you're gonna be able to write off more
than a regular IRA and that's why small business owners 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 might accent
library on my website the links below okay now I want to have 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 w-2 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 that got this LLC over here and they might have flow-through
losses or if these LLC's are 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 gonna we're gonna go analyze this and create the backdoor SEP
so what was the rule we can't set up a separ
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 taking hardly any
write-offs at all because you're gonna maximize your write-offs here and then
we drive this 40 grand out we can generate a ten thousand dollar SEP
deduction now that could bring pretty cool that could be a great way to
backdoor into a separate 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 set for myself without including my
employees what can 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 I had a call like this but 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 white board and see what real rules are here so we go back to our opps
and assets and we're gonna focus over here on our sole proprietor or our
escort and so we're going to decide which bucket we're gonna 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 hundred 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 eighteen 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 septa duction 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
this up move to the 401k and jam it down and ramp up
401k this is why tax attorneys make the big bucks is because we're saving you
ten 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've none of those big law firms in the city those are for those tax
attorneys are working for Wall Street you know fortune when thousands or
whatever and they're spending we're trying to do this affordably for our
clients so if this is blown you right don't think you're out of the realm of
this this is a restaurant owner a dentist a doctor a plumber an
electrician or 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 gonna
focus on number of part-time employees versus full-time and when they started
and we still may be able to jump into the set 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 401 K
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 are you what can you do
there's really two options first just consider a traditional IRA now if you
make too much money 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 SAP you're too late for the 401 K 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 go oh my gosh that's almost malpractice
because it is so easy to do what's called a backdoor Roth or you make a non
deductible contribution to a traditional and then on day 2 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
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 to 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 eyes eye
arrays 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 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 SAP 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 the sole prop LLC or an S Corp or an LLC
taxes in a LLC taxes and escort and so what we do is we do our set this year
however we're gonna do it and we take whatever write-off we can get anything's
better than something is better than nothing so we get rolling here now next
year what we do is we adopt a 401 K and maybe a solo 401 K because you don't
have any full-time employees and this 401 K can now be self-directed by you
create LLC's and businesses and invest it even do it real estate whatever you
want with this 401 K get better rates of returns than an ETF or a mutual fund and
this SAP rolls into the 401 K no penalties no tax and you can just roll
it up into this 401 K 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 it the last minute and get it right 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 2
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 it right off now and maybe use that SEP as a last minute
write-off hope this was helpful also please note every week I'm shooting
new videos to help you save taxes protect your wealth as a lawyer and also
hope 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