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Solo 401k vs Backdoor Roth

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  • Solo 401k vs Backdoor Roth

    For years we have contributed the max to my available 403b and 457 through my primary employer as well as Backdoor Roth IRAs for my wife and I. I just recently heard your podcast about $54K total 401k contributions through Solo 401k, etc. and have an interest in pursuing this through my independent contractor entities for which I receive a 1099 in one company and a K1 through another.

    Assuming fixed total dollar contributions (meaning I can't increase contributions/year any more), am I better off continuing Roth contributions as is or is it better to open a Solo 401k and divert contributions to that account instead? Is it always better to fill any and all available tax deferred "buckets" first, or is there a point at which diversity in tax deferred vs tax free accounts improves one's situation?

  • #2
    There is no one-size-fits-all 'always better' solution. As I've posted in a prior thread, our "general" rule of thumb is to target 1/3 each to Roth, taxable, and pre-tax accounts at retirement. While this is not an 'always better' resolution, it gives us something to benchmark our clients' current portfolios. Each allocation has a purpose. The timing of the allocation of your dedicated retirement funding depends upon many factors: your financial plan, stage of career, projected tax bracket for the year, even the state of the stock market, among other factors.

    The K1 may be problematic in your ability to contribute to a solo-401k. You need to take this up with your tax professional or financial planner.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      If you have 403(b), the max you can contribute to a solo 401(k) is $54,000 minus your 403(b) total. So if you put in $18,000 as elective deferrals to the 403(b), you can only put in a max of $36,000 of "employer contributions" to the 401(k). This wouldn't be true if it were a 401(k), but the government consisted the 403(b) to be controlled by the individual instead of the employer.

      The maximum on "employer" solo 401(k) contributions is 20% of your net profits from 1099s, which is income, minus expenses, minus half of self-employment tax. It can also be 25% of your corp's W-2 income (same thing, just different way of expressing it), but you don't seem to get this. Corporate pass-through distributions to shareholders on a K-1 aren't used for contributing to 401(k).

      No reason why you couldn't do both, it seems. They're not mutually exclusive.

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      • #4
        Hello,

        I need some help with choosing Solo 401K or Sep-IRA

        Here is the breakdown of my income

        50K from W-2 (part time so I don't have any retirement plans set up)

        350K from 1099 which is going to my S-Corp. Of this 350K about 100K are my expenses and I will be paying myself abut 110K in wages. the rest of the 140K will be K-1 (pass through income).

        I would like to know what the advantages of each are and what would fit me the most.

         

        Thanks

        Ed

         

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        • #5




          I need some help with choosing Solo 401K or Sep-IRA

          Here is the breakdown of my income

          50K from W-2 (part time so I don’t have any retirement plans set up)

          350K from 1099 which is going to my S-Corp. Of this 350K about 100K are my expenses and I will be paying myself abut 110K in wages. the rest of the 140K will be K-1 (pass through income).

          I would like to know what the advantages of each are and what would fit me the most.
          Click to expand...


          If you plan on doing backdoor Roth conversions, you should choose the solo-k. The only reason I see for you to set up a SEP instead is if you want an extra 9-1/2 months to contribute to your retirement plan, which you can do with a SEP. That's not what I would recommend from a long-term investing standpoint, but some people have cash flow problems for one reason or another.

          These 2 posts on small business retirement plans may be helpful:

          Now, about that s-corp. If your net profit is only $250k, you would likely be better off, financially, by dissolving the s-corp and saving yourself the fees for payroll administration and 1120S tax filing, not to mention the annual state licensing fees.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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