Should I borrow money to fund my SEP?
 

I had a really good season fixing lawn mowers this year. As a result, I will have a pretty hefty tax bill come April.

I am ashamed to say the I did not save enough to pay this tax. I went on vacation, bought a couple of used Benzes, etc. --basically had a good time.

I am pondering a couple of ways to deal with this.

1. Fund the my SEP (simplified employee pension for the business) to the max. The max for my plan is $11,500. If I do this, it lowers my net income and the resulting tax becomes manageable. I do not have $11,500 lying around. I am thinking of borrowing it from my local bank (personal loan) and putting up collateral (common stock) and the rate is only 5% simple interest. It will take me a year to pay it back and pay around $500 in interest. If I do this, I will not have to pay about $4000 in federal taxes.

2. Just pay the tax. As stated above, I will owe about $4000 in federal taxes. I will have to sell stock or find another way to pay it.

When I called the local banker yesterday, he acted like he has never seen this done before (borrow to fund a retirement plan or borrow to lower a tax bill). So am I crazy for wanting a small tax bill but going into hock for it for a year?

It sounds like you have thought it through pretty well. If you have trouble paying the loan for some reason you can sell the stock, right?

But I am not an accountant.

I have stayed in a Holiday Inn Express recently though!;)

Note if you sell stock shares, you will have capital gains tax to pay. I would avoid taking out a loan. Sell some stock now (they are up, right?) to fund your SEP, then sell some more next year when taxes are due.

Did you ever play one on T.V.? :D

:laughing:

Your age would be a big factor in this calculation. If you will get your money back in a few years before inflation can eat the value, could be a wise move. Gonna hurt for a year though. Then you have to figure paying the loan all year plus making quarterly payments to IRS so you don't owe a boat load next year. It's your cash flow. And your banker ain't too bright if he has never heard of such a thing.

Good idea
 

It is a good idea no matter how you look at it. PROVIDED that you can afford the interest and pay the loan back.

1) The money in SEP is always yours. You would save $4000 in tax. Assuming $500 in interest. That means you fund your SEP with $7500. Total outlay $8000 and you end up with $11K. A 37+% return in one year. Where can you get that kind of reurn.

2) If you invest wisely then the $11K will be more when you retire.

3) Sell some loss making stock and fund it. Save some more in tax.

4) Sell some profitable stock NEXT year to pay back the loan.

5) Can you fund the SEP for this year on or before Tax time next year?

Investing in yourself in SEP, IRA, ROTH IRA is the best way to save tax - as long as you can afford it. It looks like that you can.

Pay the $4k this year and plan better next.

I don't have much faith in the short term stock market, so I would cash out half, or the full funding amount of the SEP, which ever is less. As ah-kay said you do want to check if you can still fund the SEP early next year for this year to time the tax on your profits. Then just pay the federal piper. Don't reward yourself with a loan bail out for bad planning. Then instead of repaying a loan, rebuild your stock portfolio and SEP, buying into the dips.

Donate something to charity and get a tax reduction?

Never rob Peter to pay Paul.

It's a shame you kept such good records...

Wait, did I just say that out loud?