As the owner and only employee of his consulting business, Tim was doing well. His business had been in operation for over 10 years and had experienced steady but manageable growth. Good with numbers and highly organized, Tim had managed his own finances for years, but now he was starting to wonder if he was leaving money on the table and decided to hire a professional to find out.
In looking to the future, Tim wanted to begin saving more aggressively for retirement but wasn’t sure which kind of account made the most sense for him.
We discussed the different retirement options available to him, including a ROTH IRA, SIMPLE, and SEP, and the various eligibility requirements and limits of each. Given Tim had no employees and no plans to add any in the future, we determined a SEP would be the best fit, allowing him to put away up to $58,000 for 2021 and get an immediate tax deduction for the full amount, saving him even more.
Because SEP contributions can be made up until the filing of the business tax return, maximizing Tim’s SEP is now a recurring planning topic, including accounting for increases as the law allows, coordinating with his financial advisor, and timing contributions when it makes the most sense for Tim.
Tim’s family had recently expanded with the addition of his first child, making now the right time to set up a college fund. Multiple options exist for setting up long-term educational saving accounts, and Tim wanted to know which was best suited to his particular situation.
We started by discussing the benefits and rules of a 529 plan.
By setting up an account for his child, Tim would not only be able to save for college but also reduce his taxes with up to $3,000 in state tax deductions each year. We discussed that this deduction would phase out as his income increased, but all earnings in the plan would grow 100% tax-free despite his adjusted gross income. All withdrawals for qualified education expenses would be tax-free as well, and in the event his child didn’t go to college the 529 plan could be rolled over to another child.
He may have already been sold, but our projection showing annual contributions of $2,500 for 18 years with a 7% rate of return could be worth $90,000 (along with $15,000 in potential 529 tax savings) sealed the deal. Tim signed up online that day!
Once we created the plan for Tim, the next step was helping implement it. Tim recognized the benefit of having professionally prepared monthly reporting so he would always know how the business was doing without having to invest the time in working through the numbers himself.
Tim also opted to work with us for the filing of his annual state and federal taxes. Combining these services with our audit protection freed up his time during his busy season and provided him with additional peace of mind that his taxes would be done right and every deduction would be used to his best advantage.