The second quarter of 2006 is over, time again to check in on my progress towards my 2006 Financial Goals. See my progress in Q1.
Separate business and personal financial worlds
Actually, I have recently incorporated my self-employed business as an S-Corporation. I’ve been meaning to write more about this, but I’ve found it hard to condense the information into a blog-sized bit. I’ve also learned a ton about setting up an IRS-recognized home office and tax deductions for self-employed businesses. More on this soon.
Roll over Traditional IRA to Roth IRA
I don’t think I’m going to do this anymore, given that we are not going to be in the 15% tax bracket like I thought we might this year. I will instead contribute more to other retirement accounts.
Implement Business Idea A
Not done due to my business partner (my wife) being busy with her own career, and career definitely comes ahead of pet project. I’m going to try and learn the skills that I lack from her so that I can do everything on my end.
Have achieved 3 new freelancing clients
Done.
Things already finished last quarter:
Open a SEP IRA for 2005 business income at Vanguard.
Do my taxes and research to maximize tax return.
Looking forward at Q3 goals:
I didn’t think I’d be working over the summer, so things might change a little bit with less time for side stuff. I also didn’t know my wife was going to get a 401k at her job. So now I have to decide between using her 401k, setting up a Solo Self-Employed 401k on my end, or to keep contributing to my SEP-IRA. Will do that soon.
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Use her 401k. The problem with the SEP-IRA’s is that you can only take 25% of your ‘salary’ towards it. Now the problem is that every penny you pay yourself as a ‘salary’ is subject to social security taxes (both sides). This negates any benefits you could get from the SEP.
They’re great if you’re 100% self employed, but if it’s part time money you can usually just pass it through without paying the social security.
– Bryan
I’m pretty sure I’ll have to give myself enough salary due to the IRS ‘reasonable salary’ rule to have enough to put away in a Solo 401k, but yes I’m probably not going to use a SEP-IRA due to the 25% cap. Taking it all as distributions probably isn’t going to cut it if I get audited.
I’m not quite understanding why you opened up an S-corp. I have recently been doing research on this exact topic. I work full-time plus have a side “service” oriented business (computer consulting). I considered doing this, but the only benefit that I can see is that my assets are protected from being sued. Yes, this is important, but currently my business is selective in who I service.
Did you choose s-corp for asset protection, or is there some other benefits that I’m missing?
Jon, as to the conversion to Roth IRA, you mentioned that you will not in the 15% tax bracket. Actually this may not be the case even though I do not the exact figures of your income. If your wife contributes the max to her 401k which is tax-deferred, it may effectly bring down your AGI and therefore lower your tax bracket. Another trick you may play in your business is to have your clients pay your work next year – just send them invoices a little late – I am sure your clients will be happy to see a late bill. This way you will have lower income this year and may still be in the 15% brakcket.