Announcement

Collapse
No announcement yet.

Solo 401K as a resident

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Solo 401K as a resident

    Hi all. I have a question about solo 401ks, specifically traditional versus Roth, as a resident who does a fair amount of moonlighting. I know there have been threads on this before, but there are a few quirks in my specific situation that I wanted to feel out, though if something similar has been posted before, I'd be happy to just read a link and abandon the thread.

    Background:

    I'm in my last year of residency, late 20's, living in California. I had minimal student debt (went to Texas for medical school, which made a big difference) and wiped it out by moonlighting a ton early on in residency. I currently contribute $6k yearly to a Roth IRA and max out a 457 at $18.5k yearly through my employer (hospital is affiliated with the county government, so I feel the money is safe, I'll also be able to roll it over when I leave). These are currently my only retirement accounts.

    I am looking into moonlighting opportunities during my final year of residency that are outside of my current hospital, and am looking at a few 1099 offers so that I can have a solo 401k. In 2018 I made about $125k (I can be more specific with numbers if it helps with calculations, just trying not to be gauche) and the 1099 offers I have this year would have me making about $175k if I am realistic about hours I can pull. I am planning on maxing out my 401k and making as much employer contribution (via sole proprietorship) as I can. When I graduate, jobs in the area start at around $225-250k.

    My main question is whether I should be doing a traditional 401k or a Roth. From what I'm reading, it is best to do Roth if I'm outside of my peak tax bracket, which I currently am. There is one other wrinkle though, if things work out I'll be doing a fellowship next year that's fairly rigorous, and I won't be able to moonlight nearly as much, so yearly income would dip back down to around $70-90k. Given that my income will decrease so dramatically, it seems like the best move may be to put everything in a traditional 401k now, and then during fellowship convert it to a Roth given that my tax bracket will be significantly lower. If I am not able to get into fellowship, it still seems that a Roth would be advantageous at this stage in my career.

    Just wanted to get some people more experienced than myself to think through this with me to make sure I'm not making any glaring errors. Thanks!

  • #2
    I make >600k/year and I still have a Roth portion in my Solo 401(k).  I may take a tax hit now, but the years of growth make it worth it.  No RMD's, no taxes in the future (unless Congress changes the law), well worth it in my opinion.

    You may want to check to see if your 457 contributions will limit your employee contributions to your Solo 401(k).  You may be limited to employer contributions only.  However, I am not that familiar with 457 plans.  Spirit Rider probably knows.

    Comment


    • #3
      You won’t be able to roll a governmental 457 into anything other than another governmental 457. The 457 doesn’t affect your employee contribution limits into a solo 401k. Does your employer have a 401k?

      You can put 19k into your 457 this year, but I would try to put 19k in a 401k first, if available. Those can be rolled over. If your employer does not have a qualified plan you should put 19k into your individual 401k as an employee contribution and then do what you can to put an employee contribution in (20% x net profit (revenues-expenses-1/2 SE tax)).

      As to your question, if you are single then you are playing in a marginal tax bracket of 41.3% (32 federal + 9.3 CA). I don’t know how much you have squirreled away so far, but at those rates I would almost assuredly advise you to do traditional and not Roth.

      Comment


      • #4


        You won’t be able to roll a governmental 457 into anything other than another governmental 457.
        Click to expand...


        Actually, that restriction applies to a NPO 457b. A governmental 457b can be r/o into a 401k, IRA, etc. Devwci wouldn't have a NPO 457b at this point.

        I like your idea of converting to a Roth in your fellowship year. You may have to discontinue your solo-k to do so - someone else will have to address that.
        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

        Comment


        • #5





          You won’t be able to roll a governmental 457 into anything other than another governmental 457. 
          Click to expand…


          Actually, that restriction applies to a NPO 457b. A governmental 457b can be r/o into a 401k, IRA, etc. Devwci wouldn’t have a NPO 457b at this point.

          I like your idea of converting to a Roth in your fellowship year. You may have to discontinue your solo-k to do so – someone else will have to address that.
          Click to expand...


          Thank you for the correction!  Sorry for the bad info, OP.

          Comment


          • #6


            My main question is whether I should be doing a traditional 401k or a Roth.
            Click to expand...


            you didnt provide the info needed: what is your current marginal rate including state taxes?

            Comment


            • #7




              You may want to check to see if your 457 contributions will limit your employee contributions to your Solo 401(k).  You may be limited to employer contributions only.  However, I am not that familiar with 457 plans.  Spirit Rider probably knows.
              Click to expand...


              Total 457b employee + employer* contributions are limited to the same dollar amount as the employee elective contribution limit (2019 = $19K), However, they are not included in the respective employee elective contribution limit or annual addition limit (2019 = $56K).

              *It is rare for there to be employer contributions in a 457b, because it limits employee elective contributions.

              Comment


              • #8


                My main question is whether I should be doing a traditional 401k or a Roth.
                Click to expand...


                Assuming you're single (you didn't mention a spouse) then it looks like you will probably fall into the 24% tax bracket. Here's a link to a WCI article on the topic: https://www.whitecoatinvestor.com/section-199a-deduction-qbi-and-retirement-accounts/ Pay particular attention to the section entitled Using Roth 401(k) Contributions to Increase QBI Deduction and the section entitled The Mega Backdoor Roth IRA.

                You may have to find a custodian that will allow Mega Backdoor Roth IRA in your Solo 401(k), but it would be well worth it.


                Given that my income will decrease so dramatically, it seems like the best move may be to put everything in a traditional 401k now, and then during fellowship convert it to a Roth given that my tax bracket will be significantly lower.
                Click to expand...


                It would probably be worth it to consult with a tax strategist on this, as doing pre-tax 401(k) contributions will have a big impact on your QBI deduction.

                Comment


                • #9




                  I like your idea of converting to a Roth in your fellowship year. You may have to discontinue your solo-k to do so – someone else will have to address that.
                  Click to expand...


                  Another option is a one-participant 401k that supports an In-plan Roth Rollover IRR. To my knowledge, the only mainstream provider to offer an IRR is Etrade.

                  The OP could use Etrade's adoption agreement to amend their one-participant 401k to Etrade and do a trustee -> trustee transfer of all assets. If they elected to have designated Roth accounts and support for IRRs. They can do IRRs of their pre-tax balances as they wish to the designated Roth account. Any IRR of pre-tax balances will be taxable in the year they occur.

                   

                   

                  Comment


                  • #10





                    My main question is whether I should be doing a traditional 401k or a Roth. 
                    Click to expand…


                    you didnt provide the info needed: what is your current marginal rate including state taxes?
                    Click to expand...


                    Marginal rate in 2018 was 33.3% (24% federal, 9.3% state). In 2019 assuming I make my forecasts, it'll be 41.3% (32% federal, 9.3% state).





                    My main question is whether I should be doing a traditional 401k or a Roth. 
                    Click to expand…


                    Assuming you’re single (you didn’t mention a spouse) then it looks like you will probably fall into the 24% tax bracket. Here’s a link to a WCI article on the topic: https://www.whitecoatinvestor.com/section-199a-deduction-qbi-and-retirement-accounts/ Pay particular attention to the section entitled Using Roth 401(k) Contributions to Increase QBI Deduction and the section entitled The Mega Backdoor Roth IRA.

                    You may have to find a custodian that will allow Mega Backdoor Roth IRA in your Solo 401(k), but it would be well worth it.


                    Given that my income will decrease so dramatically, it seems like the best move may be to put everything in a traditional 401k now, and then during fellowship convert it to a Roth given that my tax bracket will be significantly lower. 
                    Click to expand…


                    It would probably be worth it to consult with a tax strategist on this, as doing pre-tax 401(k) contributions will have a big impact on your QBI deduction.
                    Click to expand...


                    Hmm. I suppose I'll have to search out a local tax person to further investigate this, I hadn't realized I'd get the 199A deduction as a sole proprietor...ignorance on my part.

                    Comment

                    Working...
                    X