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SEP IRA + Solo 401k + Backdoor Roth (in the same tax year)?

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  • SEP IRA + Solo 401k + Backdoor Roth (in the same tax year)?

    Hello all, I am new to white coat investor (I wish I had known about it sooner).

    All of my income comes from 1099 work. I currently have a SEP IRA but won't make enough to max it out. Is it true that I can also open a solo 401k to get an extra $18k (as the employee contribution) of tax deferred savings (up to the $53k max)?

    Assuming that's possible, can I then roll the SEP-IRA into the solo 401k in December to allow me to do the backdoor roth ($5.5k) before tax time?

    If contributing to a solo 401k isn't possible in the same year, my current plan for 2016 is just to put the most allowable in my SEP, roll it into a solo 401k in December and then do the backdoor roth after that.

    Basically, I would like to max out my tax deferred savings for 2016. I was initially told to go with the SEP since I wasn't sure how long I'd be doing contract work. Now that I am doing it, I can see myself continuing to do it and will definitely stick with a solo 401k from 2017 onwards.

    Any input would be appreciated, thanks!

     

     

  • #2
    Welcome to the site!

    1. You can contribute a total of $53k to the SEP and/or SOLO-k + another $6k if you are age 50+.

    2. You cannot have 2 separate plans with the same employer in the same year. May be possible to reclassify the SEP contributions to 401k contributions for 2016, however, BUT I think I may have an even better solution -

    3. If you did not contribute to a SEP for 2015, you have until 10/15/16 to do so. Ask your custodian to change the contributions you have made so far for this year to 2015 contributions then set up and contribute to the SOLO-k for 2016. R/o any SEP balance into the SOLO-k.


    You can also remove all SEP contributions for 2016, set up a SOLO-k and re-deposit contributions to it instead. I would not go through all of this unless you will be able to get more into the 401k than you will the SEP.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

    Comment


    • #3


      If you did not contribute to a SEP for 2015, you have until 10/15/16 to do so. Ask your custodian to change the contributions you have made so far for this year to 2015 contributions then set up and contribute to the SOLO-k for 2016. R/o any SEP balance into the SOLO-k.
      Click to expand...


      I should have mentioned it, but I didn't start contract work until 2016, so I can't make contributions for 2015.

       


      You can also remove all SEP contributions for 2016, set up a SOLO-k and re-deposit contributions to it instead.
      Click to expand...


      I think that's what I'm going to do. I plan to remove the SEP funds as an "excess contribution" and then put the money into a solo 401K.

      Thanks so much for your guidance

      Comment


      • #4




        You cannot have 2 separate plans with the same employer in the same year.


        I'm not sure this is true. While a SIMPLE IRA must be for an entire calendar year, the prohibition is on having a 5305 SEP IRA and a Solo 401k at the same time and for the same income.

        I believe it would be entirely permissible to terminate a SEP IRA after a partial year and adopt a Solo 401k for the remainder of the year and future years. Of course, only the income earned prior to termination of the SEP IRA could be used to calculate the maximum SEP IRA employer contributions. Likewise, only the income earned after adoption of the Solo 401k could be used to calculate the Solo 401k's employee deferrals and employer contributions. The 415c annual addition limit would apply to all contributions in the year.

         

        Comment


        • #5




          jfoxcpacfp wrote:You cannot have 2 separate plans with the same employer in the same year.

          I’m not sure this is true. While a SIMPLE IRA must be for an entire calendar year, the prohibition is on having a 5305 SEP IRA and a Solo 401k at the same time and for the same income.

          I believe it would be entirely permissible to terminate a SEP IRA after a partial year and adopt a Solo 401k for the remainder of the year and future years. Of course, only the income earned prior to termination of the SEP IRA could be used to calculate the maximum SEP IRA employer contributions. Likewise, only the income earned after adoption of the Solo 401k could be used to calculate the Solo 401k’s employee deferrals and employer contributions. The 415c annual addition limit would apply to all contributions in the year.
          Click to expand...


          That may be so, but I was unable to find any way permissible in the code for a client who wanted to do the same, albeit move from a 401k to a SIMPLE IRA mid-year. We did a quite exhaustive amount of research and could not give our client any level of comfort that it would work. Because this was for a 15-employee plan, we could not recommend.

          I would be happy to for you to give me code section with explanation of how to accomplish. For us, it got down to EOY reporting - cannot have a W2 showing 2 separate plans. If you have sound information beyond what you believe, I would (seriously) like to learn more.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #6







            jfoxcpacfp wrote:You cannot have 2 separate plans with the same employer in the same year.

            I’m not sure this is true. While a SIMPLE IRA must be for an entire calendar year, the prohibition is on having a 5305 SEP IRA and a Solo 401k at the same time and for the same income.

            I believe it would be entirely permissible to terminate a SEP IRA after a partial year and adopt a Solo 401k for the remainder of the year and future years. Of course, only the income earned prior to termination of the SEP IRA could be used to calculate the maximum SEP IRA employer contributions. Likewise, only the income earned after adoption of the Solo 401k could be used to calculate the Solo 401k’s employee deferrals and employer contributions. The 415c annual addition limit would apply to all contributions in the year.
            Click to expand…


            That may be so, but I was unable to find any way permissible in the code for a client who wanted to do the same, albeit move from a 401k to a SIMPLE IRA mid-year. We did a quite exhaustive amount of research and could not give our client any level of comfort that it would work. Because this was for a 15-employee plan, we could not recommend.

            I would be happy to for you to give me code section with explanation of how to accomplish. For us, it got down to EOY reporting – cannot have a W2 showing 2 separate plans. If you have sound information beyond what you believe, I would (seriously) like to learn more.
            Click to expand...


            You misread my post. Yes, you can only change from a SIMPLE IRA to another qualified plan on a calendar year basis. However, there is no such restriction on SEP IRA plans or 401k plans. They both can be partial year plans.

            However, my suggestion about terminating a 5305 SEP would not be sufficient. If the SEP IRA is not a 5305 SEP IRA or is amended to a prototype plan, then the Solo 401k plan could be adopted later in the same year.

            Comment


            • #7
              We were actually trying to change from a 401k to a SIMPLE. Even if to SEP, still looking for the code section that allows and how it would be presented on the W2. Any ideas?
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8
                I have a question about joint tax filings and iras. My girlfriend's and I are getting married next year. We plan on doing a joint tax return. I have a SEP that i contribute to yearly. She is a nurse and files a w2. Is it possible for her to contribute to a backdoor roth IRA and I continue to contribute to my SEP? Hope that makes sense. Thanks!!

                Comment


                • #9




                  I have a question about joint tax filings and iras. My girlfriend’s and I are getting married next year. We plan on doing a joint tax return. I have a SEP that i contribute to yearly. She is a nurse and files a w2. Is it possible for her to contribute to a backdoor roth IRA and I continue to contribute to my SEP? Hope that makes sense. Thanks!!
                  Click to expand...


                  Yes. Your SEP does not affect your spouse's eligibility for tax-free backdoor Roth conversions. The plan goes with the individual.

                  I hope you will consider setting up a SOLO-401k and rolling your SEP into it so you, also, can contribute to a backdoor Roth IRA. Is there a reason you haven't done so?
                  Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                  Comment


                  • #10
                    Honestly, I am a novice and I did not realize I could. Still learning about it all. I got the impression you could only have one (SEP) or the other (backdoor roth). Sounds like that is the best way go (convert sep into the backdoor)? Sorry for the ignorance. Thanks for your help!!

                    Comment


                    • #11




                      Honestly, I am a novice and I did not realize I could. Still learning about it all. I got the impression you could only have one (SEP) or the other (backdoor roth). Sounds like that is the best way go (convert sep into the backdoor)? Sorry for the ignorance. Thanks for your help!!


                      Lots of novices around here! What you need to do is open a SOLO-401k and move your SEP into that and close the SEP. Then you'll be able to contribute to a backdoor Roth IRA, tax-free.

                      See:
                      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                      Comment


                      • #12
                        For tax exemption purposes, does it matter that I close the SEP? For some reason, my accountant told me a SEP would be a good tax shelter. Sorry for simplicity, but I really appreciate your help!

                        Comment


                        • #13




                          For tax exemption purposes, does it matter that I close the SEP? For some reason, my accountant told me a SEP would be a good tax shelter. Sorry for simplicity, but I really appreciate your help!
                          Click to expand...


                          A SOLO-401k is just as good or better. Maybe your accountant doesn't know the rules of SOLO-k's and is jut more comfortable with a SEP IRA. If you'll read the articles I posted, you'll have the information you need to discuss with him/her.
                          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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