Tax Shelters

[Mephistopheles]

My dad, who's a small business owner, is trying to come up with some ways to lower his tax burden. Several strategies a financial adviser told him about include: 401k Plan, Charitable Lead Annuity Trust (CLAT), and Restricted Property Trust (RPT).

 

The only one of the above strategies that I have an opinion on is the the 401k. The big downside, at least with the administrators we talked to, is that he can't invest in stocks, so we would have to invest in mutual funds. Does anyone know of brokers that offer 401k administering plans in which you can invest in stocks? The other option was SEP IRA, but the max he can invest in that is 25% of his salary, which is $25,000. (His total salary/bonus is $150,000, but under the advice of his accountant he takes 1/3 of it as a bonus, I'm not sure the reason for this.)

 

Some facts about my dad:

1. FY14 Business Income (Salary + Bonus): $150,000

2. FY14 Rental Income: $90,000

3. FY14 IRA to Roth Conversion: $110,000

4. FY14 Realized Capital Gains + Dividends: $10,000

4. Employees: 3 (including himself)

5. Age 57, married filing jointly

6. NJ resident

 

I'm wondering if any tax savvy members of this board can provide their opinions of these, or suggest other strategies.

 

Thanks for your help.

[Mephistopheles]

So upon some research in regards to the SEP-IRA, I feel like the salary/bonus distinction doesn't really exist, just something I heard from my dad but maybe he was misinformed.

[ERICOPOLY]

Have you talked to Fidelity?  I think they'll have a plan for him where he can invest in stocks or even options.

 

My wife was self-employed and I got her enrolled in a "401k with profit sharing" plan at Fidelity in early 2004.  She could put the usual $16k or so annually in there, and then put the 25% profit sharing bit on top of that.  We funded it three years in a row (2004,2005,2006) for roughly $20k per year, so about $60k total.

 

Then I invested that account in FFH call options in 2006... so it got a boost there.  And then a few other lucky trades over the following years.  Today's it's a happy number.

[crastogi]

Have you talked to Fidelity?  I think they'll have a plan for him where he can invest in stocks or even options.

 

My wife was self-employed and I got her enrolled in a "401k with profit sharing" plan at Fidelity in early 2004.  She could put the usual $16k or so annually in there, and then put the 25% profit sharing bit on top of that.  We funded it three years in a row (2004,2005,2006) for roughly $20k per year, so about $60k total.

 

Then I invested that account in FFH call options in 2006... so it got a boost there.  And then a few other lucky trades over the following years.  Today's it's a happy number.

 

Hi Ericopoly -

 

Will they allow you to buy/sell options in individual 401k or self directed IRA?

[rkbabang]

Have you talked to Fidelity?  I think they'll have a plan for him where he can invest in stocks or even options.

 

My wife was self-employed and I got her enrolled in a "401k with profit sharing" plan at Fidelity in early 2004.  She could put the usual $16k or so annually in there, and then put the 25% profit sharing bit on top of that.  We funded it three years in a row (2004,2005,2006) for roughly $20k per year, so about $60k total.

 

Then I invested that account in FFH call options in 2006... so it got a boost there.  And then a few other lucky trades over the following years.  Today's it's a happy number.

 

I'll second that.  My old employer used Fidelity for our 401K.  They call it "Brokerage Link".  I was able to invest in stocks and options, same as a brokerage account.  The only things you can't do is buy your own company's stock, use margin, or write uncovered options.  You can buy a call, but if you sell a call you need to hold enough of the stock to cover it.

[ERICOPOLY]

Have you talked to Fidelity?  I think they'll have a plan for him where he can invest in stocks or even options.

 

My wife was self-employed and I got her enrolled in a "401k with profit sharing" plan at Fidelity in early 2004.  She could put the usual $16k or so annually in there, and then put the 25% profit sharing bit on top of that.  We funded it three years in a row (2004,2005,2006) for roughly $20k per year, so about $60k total.

 

Then I invested that account in FFH call options in 2006... so it got a boost there.  And then a few other lucky trades over the following years.  Today's it's a happy number.

 

Hi Ericopoly -

 

Will they allow you to buy/sell options in individual 401k or self directed IRA?

 

I used my wife's account to purchase calls and write cash-covered puts.

[Mephistopheles]

Thanks for the tips Eric and rkbabang, I will be giving Fidelity a call! So glad to see that a broker allows equity trading in 401k. I think it's sinful not to!

[crastogi]

thanks!!

[constructive]

I was on my 401(k) committee a couple of years ago, selected Fidelity, and they are great.

 

However a 3 person business might be too small to be economical with Fidelity. You could also look at Employee Fiduciary, I think they specialize in ultra small companies.

[Mephistopheles]

I was on my 401(k) committee a couple of years ago, selected Fidelity, and they are great.

 

However a 3 person business might be too small to be economical with Fidelity. You could also look at Employee Fiduciary, I think they specialize in ultra small companies.

 

So I just spoke with both Fidelity and Schwab today. You're right, the business is too small for them to administer, but they did say we can get a third party administrator and hold the brokerage with them.

 

Does anyone have good recommendations on 3rd party admin firms?