I owe about $8.5k in taxes for my LLC. I have plenty of cash saved up because all I do is hoard it in my high-yield savings account, and haven't contributed to my Roth in years due mostly to being a cash poor business owner. Now I have about $75k in savings, but I am having an incredibly hard time putting that money into the markets. I know the smart move is to contribute to an SEP-IRA account and reduce my taxable income further. I'm just having a really hard time letting go of cash.
Convince me to open a SEP-IRA before I pay taxes tomorrow
byu/Turtlefarming inpersonalfinance
Posted by Turtlefarming
10 Comments
If it helps, while money in a SEP IRA (or other retirement account) likely should be invested, it doesn’t have to be. You can continue to hold cash or cash equivalent inside your IRA.
If you haven’t contributed to an IRA and don’t want to contribute more than $7k and qualify for the trad IRA deduction, a regular traditional IRA contribution is probably better because it doesn’t reduce your QBID.
$75k in savings doesn’t sound “cash poor” to me.
In essence by not opening the IRA you are saying you rather pay the government more of your cash, so either save the cash for yourself or pay it and never see it again. You own your IRA, you’re paying future you cash. If you can’t bring yourself to do the full amount, at least do a few thousand. Good luck!
I’ve had a SEP IRA since starting my company and recently converted to a solo 401k (higher contribution limits and more flexibility). It is vital to my retirement planning and reducing my taxable income. It saves me $20,000+ in taxes each year and lets me keep more of my own money. I guess the question is whether you want to keep your money or give it to the IRS.
I think (I may be wrong) that for a retirement contribution to count towards 2025 and reduce taxable income, the retirement account had to have been opened in 2025.
I know this because I rushed to open one on Dec 29th
You should put it in a SEP IRA. Or you could put it in a Roth IRA and withdraw the principal at any time if that eases your cash worries.
If you own a business, you could always just create a pension plan for yourself. Depending on your age a cash balance pension gives you a ton of savings capacity, and the goal in those types of accounts isn’t capital appreciation so much as it is tax avoidance.
Could basically put all your contributions in a bond fund and call it a day.
You’re conflating “should I pay more taxes than I need to” with “how if at all should I invest my money right now?”
If you already know you’re going to keep the cash under a mattress vs. have to spend it even at the penalty of extra tax burden, the answer to at least the former doesn’t seem that complicated.
Like another commenter said, you can invest your retirement account in cash equivalent if you’d like.
Example with numbers:
You keep 25K in a 5% taxable account. Assuming you are in a 22% tax bracket, so you have presumably already paid $5500 in taxes on that cash.
Each year you pay tax on the 5% interest starting with 22% of the interest of first year interest of $1250 (tax=$275) and continue to pay taxes for each of the next 20 years when you will get $2585 in interest (compounded less taxes paid) and pay tax of $568. You will have $53734 in your account after 20 years and have paid an additional $8104 in taxes over the 20 years.
Now you have built a Roth IRA up to 25K (you can’t contribute that all at once, but you can do that over 3-4 years). Again, you have already paid $5500 in taxes.
But, now you don’t pay any more tax on the earnings… At the end of 20 years you will have $66332.
In both cases (non-IRA and Roth IRA) the money can be withdrawn tax free and spent how you like but you will have $12,500 more.
Now put that 25K into a SEP IRA. You get an immediate 22% tax break which saves you $5500 today. The money will grow like the Roth IRA so you will still have $66332, but you will need to pay taxes on it when withdrawn. If you are retired, you may now be in a 12% tax bracket so you will now pay $7959 (in dollars that are worth less in 20 years). Since you saved $5500 in today’s dollars your net tax on the entire deal would be $2459 in future dollars. Plus that $5500 you saved could also be earning interest over that 20 years.
Depending on your current age, if you are not thinking about what your income will be like at retirement, then you are making a mistake.
I have an agreement with my tax accountant: I refuse to fund this corrupt government so she does my computational analysis and tells me how much to deposit. Two years running, and my account grows.
Also, NPR has a story today about people who are tax planning because they don’t want to fund wars.