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Old 12-30-2017, 11:19 AM
 
1 posts, read 409 times
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Hi,

I am trying to figure out viable retirement options for me. I am 52 years old and have a profession as a hairstylist. I am self-employed as most hairstylist are. So I am my own boss. I do not own a hair salon, but work for a salon where they take 50% of my commission and I keep the other 50%. My income give or take fluctuates every year because the business is not steady. I would say some years it was 35k, other years 45k, and sometimes as high as 50k. So my income is not stable. For the year of 2017, I expect my income to be around 40k to 45k. Also another imporant thing is my employer does not deduct taxes from my check every 2 weeks. I basically get all the money I made given to me and then at the end of the year my accountant and I figure out what deductions I can claim, what I will owe and what taxes really need to be taken out. I basically get a 1099.

I am going to be opening up a retirement account with Vanguard. I have never had a retirement account before. So now I am ready to open one because I feel like I can set a little money aside each month and donate to an account.

I contacted Vanguard but I feel like I will understand better if it is explained to me by people who can explain in laymans terms the facts. I see there is a roth IRA and something called an SEP IRA. Well SEP IRA allows you to donate a lot of money to the account like up to $53,000 or something like this. But I cannot donate that much. The most I can donate each year is like $5,000. That's why I thought maybe a roth IRA is better since the annual contribution is around what I can possibly donate. And the roth IRA will not be taxed when I withdraw at retirement correct? But the SEP IRA will be taxed? But you can claim the SEP IRA on your taxes every year and get a deduction? But for the roth IRA you cannot claim it on your taxes. Is all this correct?

Which route do you think is better for me? Remember since I am opening up an account now at 52 years of age I probably will not have a lot of money in my account when I hit 65 or even 70. So I prefer that my account is not taxed when I withdraw the money. Therefore do you think the Roth IRA is better? I really cannot donate more than 5k or 6k per year. My income is just too low for me so that is why I think the SEP IRA won't help me. But they said an SEP IRA is a good option for self-employed people. I just dont see how it is good for me knowing I dont get taxes taken out of my check, I can only donate like 5k per year and my income is low to donate alot of money each year. I also don't want my withdrawals to be taxed when I retire. Is the Roth IRA better for me?
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Old 12-30-2017, 11:46 AM
 
Location: NYC
2,926 posts, read 1,598,577 times
Reputation: 7980
Roth IRA all the way - you are in a low tax bracket already now & in the future you can add the Roth $$$ to your SS income without any extra taxes being taken out. $5K/yr for 15 years should give you around $100K unless the market takes a dive right at the start of withdrawals, you could reasonably add $4K a year to your SS income tax free then annually.

Good luck!
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Old 01-01-2018, 06:51 AM
 
2,952 posts, read 1,646,333 times
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Roth IRA, You don't make enough for a SEP and pay the taxs now, they won't get better.

However, I'm not sure you are legally self employed. Do you have set hours, etc? Does the salon furnish the supplies, like shampoo etc? Do you supply your own insurance for mistakes etc?

My CPA would argue you aren't. And they should be paying your taxes. Anyone I do business with as a contractor, has to have their own legal business. Meaning they can tell me when they can work on my project. I can not dictate when they can 'work." I can not furnish supplies to them etc. Otherwise they are my employee per the CPA. My CPA sudits other CPA's returns for the IRS. So she's a stickler.

Do you cut hair at home or have another business you work at.

For them to take 50% is steep. You are one of the group that is could possibly get screwed in this new tax law change.

Do you have a CPA or do your own taxes? Many companies will try to break the IRS rules on self employment. Doesn't mean they are doing it legally.
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Old 01-01-2018, 07:45 AM
 
Location: Central Massachusetts
4,800 posts, read 4,860,228 times
Reputation: 6379
Quote:
Originally Posted by cyrus_the_great View Post
Hi,

I am trying to figure out viable retirement options for me. I am 52 years old and have a profession as a hairstylist. I am self-employed as most hairstylist are. So I am my own boss. I do not own a hair salon, but work for a salon where they take 50% of my commission and I keep the other 50%. My income give or take fluctuates every year because the business is not steady. I would say some years it was 35k, other years 45k, and sometimes as high as 50k. So my income is not stable. For the year of 2017, I expect my income to be around 40k to 45k. Also another imporant thing is my employer does not deduct taxes from my check every 2 weeks. I basically get all the money I made given to me and then at the end of the year my accountant and I figure out what deductions I can claim, what I will owe and what taxes really need to be taken out. I basically get a 1099.

I am going to be opening up a retirement account with Vanguard. I have never had a retirement account before. So now I am ready to open one because I feel like I can set a little money aside each month and donate to an account.

I contacted Vanguard but I feel like I will understand better if it is explained to me by people who can explain in laymans terms the facts. I see there is a roth IRA and something called an SEP IRA. Well SEP IRA allows you to donate a lot of money to the account like up to $53,000 or something like this. But I cannot donate that much. The most I can donate each year is like $5,000. That's why I thought maybe a roth IRA is better since the annual contribution is around what I can possibly donate. And the roth IRA will not be taxed when I withdraw at retirement correct? But the SEP IRA will be taxed? But you can claim the SEP IRA on your taxes every year and get a deduction? But for the roth IRA you cannot claim it on your taxes. Is all this correct?

Which route do you think is better for me? Remember since I am opening up an account now at 52 years of age I probably will not have a lot of money in my account when I hit 65 or even 70. So I prefer that my account is not taxed when I withdraw the money. Therefore do you think the Roth IRA is better? I really cannot donate more than 5k or 6k per year. My income is just too low for me so that is why I think the SEP IRA won't help me. But they said an SEP IRA is a good option for self-employed people. I just dont see how it is good for me knowing I dont get taxes taken out of my check, I can only donate like 5k per year and my income is low to donate alot of money each year. I also don't want my withdrawals to be taxed when I retire. Is the Roth IRA better for me?

Roth IRA and start up a brokerage account with any money you can save above and beyond the $6500 limit. You should do everything possible to hit that number every year at this point. It is not donating either it is paying yourself first.

You should use Vanguard or Fidelity to set it up. Both accounts can use the same investments. Use a target date fund for them both. Your target date should be 2030 or 2035. However if you wish it to grow faster you might consider 2040 or 2045.
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Old 01-01-2018, 08:14 PM
 
631 posts, read 472,757 times
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Another option for you to consider is a solo 401k. SEP works on the idea of a "company match" (ie 20% of your profits) while Roth is contributing after tax money. The Solo 401K allows both a pre-tax contribution (like a regular IRA or 401k) plus you can put in a "company match."

Each of these three have a sweet spot - I think you have figured out that SEP is best for high income businesses, Roth will certainly work for you.
Agree with the advice on Vanguard and target date funds.

As I poke around on the VG web site the solo 401k is very easy to set up. And you can set it up as a Roth if that's what you want. You would also have the option for "fancier" contributions (employer match) if you later would like to .
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Old 01-02-2018, 04:23 AM
 
Location: SW Corner of CT
1,953 posts, read 1,545,340 times
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Sorry to take this in a different direction for a minute. If an IRA was started, would it be best to convert it to a Roth in retirement where your tax rate will be lower ?.
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Old 01-02-2018, 04:25 AM
 
71,934 posts, read 71,971,035 times
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why do you assume it will be lower THAN YOUR LIFE TIME TAX RATE AVERAGE ? it is not about the final years . it is about a possible 40 year career ramping up through many brackets . my retirement bracket is actually higher than my 40 years of working average out to . i started at very little and took decades to ramp up .

we did not have roths back then but if they did a roth was a slam dunk for me . our retirement tax bracket is usually close to our final working years since our lifestyle tends to be based on those years . so for most americans their career average will be lower than their retirement bracket .

some like doctors , lawyers , will be different since they tend to start at the highest brackets . my son started right out of law school at the same level i retired at . so a roth makes little sense yet .
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Old 01-02-2018, 05:53 AM
 
Location: SW Corner of CT
1,953 posts, read 1,545,340 times
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Quote:
Originally Posted by mathjak107 View Post
why do you assume it will be lower THAN YOUR LIFE TIME TAX RATE AVERAGE ? it is not about the final years . it is about a possible 40 year career ramping up through many brackets . my retirement bracket is actually higher than my 40 years of working average out to . i started at very little and took decades to ramp up .

we did not have roths back then but if they did a roth was a slam dunk for me . our retirement tax bracket is usually close to our final working years since our lifestyle tends to be based on those years . so for most americans their career average will be lower than their retirement bracket .

some like doctors , lawyers , will be different since they tend to start at the highest brackets . my son started right out of law school at the same level i retired at . so a roth makes little sense yet .
I was under the impression that Tax Rate is based on income, and in retirement, at least in my case, the level of income will be less ?
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Old 01-02-2018, 06:26 AM
 
Location: RVA
2,174 posts, read 1,273,469 times
Reputation: 4497
The OP MUST determine what she expects her retirement income to be, and the sources efore ANY decent advice can be given, and that includes an estimate of SS benefits from SSA. I would absolutely open a Roth, to start the 5 year clock, and with the new tax law, a Roth may be all she needs. Roth contributions can be withdrawn any time but earnings can only after 5 years or age 59.5, basically. But if her income in retirement is low enough or all SS, and she just wants to supplement it with a little extra, she would not pay any tax, in retirement anyway, so a Roth would only have the advantage of taking out large sums (which she would be less likely to do) without tax consequence, while a tIRA (traditional ) gives her a tax break now, so more compounds over time, and she would come out ahead. ANYTHING put aside for retirement is better than the zero she is doing now.
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Old 01-02-2018, 07:28 AM
 
71,934 posts, read 71,971,035 times
Reputation: 49499
Quote:
Originally Posted by beer belly View Post
I was under the impression that Tax Rate is based on income, and in retirement, at least in my case, the level of income will be less ?
your final years may be more when you work but usually a roth will be a far better deal since over a 30-40 year career your long term average bracket will actually be less than the final years and likely retirement too . so for most a roth will be a winner if done early on .

conversions are a mixed bag . to many variables to say if worth it or not . it is highly dependent on the total situation , including future rmd's and meshing with ss and medicare premium costs .

Last edited by mathjak107; 01-02-2018 at 07:39 AM..
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