Military doc Solo 401k with two 1099 incomes?

[Ddoc]

I am a military physician (W-2job) with two 1099 incomes from separate moonlighting gigs, with expected earnings of apx $40k and $30k from each for the 2019 tax year. I am looking in to opening up a solo 401k. I plan on contributing $19,000 for my employee contribution. My question is if am I able combine the sums of both 1099 incomes to have the 25% employer contribution using the $70k figure? Or, can I only do an employer contribution of 25% of the $40k?

Additionally, any recommendations on a traditional solo 401k vs roth solo 401k?

For background, my husband and I are both active duty military doctors, but only for the next 1 and 2 years, respectively. We are currently in a 24% marginal tax bracket for combined joint income. We have no debt, no loans, no mortgage. We will both have significantly higher income potentials as civilian providers (2x and 3-4x our current salary given our specialties). We max out our TSP, both do back door Roth IRAs, and have two 529 plans for our children.

Any advice or thoughts is greatly appreciated. Thank you!

[Peds]

Ddoc wrote:

My question is if am I able combine the sums of both 1099 incomes to have the 25% employer contribution using the $70k figure?

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yes its all 1099. but its still 1 solo 401k limit.

Ddoc wrote:

Additionally, any recommendations on a traditional solo 401k vs roth solo 401k?

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depends on income expected savings retirement age etc etc

but most should do traditional.

Ddoc wrote:

Any advice or thoughts is greatly appreciated.

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save 20% towards retirement.

youve already won the game.

[jfoxcpacfp]

Welcome to the forum and thank you both for your service!

Since you max your TSP, you won't be able to make a $19k employee contribution to a solo-k, so the Roth option is out. You will be able to contribute 20% of [combined net profit - 1/2 of FICA] to your solo-k, though, all deductible.

Another benefit of your 1099 income is that you will qualify for 20% deduction of your profits under section 199A if your taxable income is < $321,400.

[Ddoc]

Thank you for the welcome! I am pretty sure I can still do the 100% employee contribution and 20% employer for the solo 401k. My TSP max is from my w-2 job, completely separate from 1099 income.

[spiritrider]

You should listen to @jfoxcpacfp, because you are incorrect.

There is only one employee elective contribution limit (2019 = $19K) per person across all 401k, 403b, SAR SEP and SIMPLE IRA plans. There is a separate annual addition limit (2019 = $56K) for each unaffiliated employer.

If both if the 1099 payments are to you as an individual and are for the same professional activity code, you can file a single Schedule C as a single business. Even if you have to file more than one Schedule C. Some one-participant 401k providers explicitly state that the plan is for all affiliated employers. Others allow you to specify the other businesses. The contributions and limit apply to all the income sources combined

[Ddoc]

Thank you for walking me through and explaining this concept so clearly. I am trying to self educate, cut the cord from our current financial advisor, and it’s been a rough learning process.

Thanks jfoxcpacfp and spiritrider!

Additionally, could I rollover $17k from a traditional IRA ( I didn’t even realize I had been contributing to this and had blindly trusted a financial advisor three years ago to set this up) to a solo 401K the same tax year that I contribute 20% of the employee elective contribution limit?

[Steven Podnos MD CFP]

You should be able to roll over your old IRA to the SE 401k if the plan allows it (most do).

[jfoxcpacfp]

Ddoc wrote:

Thank you for walking me through and explaining this concept so clearly. I am trying to self educate, cut the cord from our current financial advisor, and it’s been a rough learning process.

Thanks jfoxcpacfp and spiritrider!

Additionally, could I rollover $17k from a traditional IRA ( I didn’t even realize I had been contributing to this and had blindly trusted a financial advisor three years ago to set this up) to a solo 401K the same tax year that I contribute 20% of the employee elective contribution limit?

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As Steven said, yes, you can. But if you’ve been contributing to an IRA, the contributions w/h/b nondeductible (unless it was a year you were both in residency) and you would want to convert to a Roth IRA. I wouldn’t fault the FA for recommending this. It is typical and allows you to put an extra $XXXX per year into a tax-deferred (or, in the case of a Roth, tax-free) account. It’s what you do next that is important. Did your FA follow up on step 2?

As to learning, I am a CPA and CFP but still consider myself a student. I bet many of the “more seasoned” members of the forum would say the same. Be patient, ask questions, and you’ll begin to feel more comfortable. There is a lot to learn - you’re in the right place to do so. Laura and I find ourselves educating the newer team members on an ongoing basis.

[spiritrider]

To add.

You can only rollover the taxable amount in a traditional IRA to a 401k. That leaves any non-deductible basis in the traditional IRA. You can then do a Roth conversion of the entire remaining balance with little to no tax liability. The only tax liability will be if there are any earnings between the time of rollover and the time of the conversion.

[Ddoc]

The advisor stated:

‘this was to contribute money to a TIRA so that you could build this up over the next year to get to the $20,000. Once there we were going to convert this to Roth into an AMS account to avoid sales charges. With funding the AMS once the account got to $20,000 you would receive breakpoints in the management fee. Otherwise, you would pay 5.75% in sales charges for each contribution.’

I jsut completed a Backdoor Roth with vanguard this week. So, did I shoot myself in the foot? I don’t believe I can contribute to Roth again since I just did this.

[spiritrider]

If you did a Roth conversion of the entire traditional IRA balance, just the portion that was not non-deductible contribution basis will be taxed. Not the worst thing. If you only did a Roth conversion of the non-deductible basis, you need to rollover the remaining taxable balance to either the TSP or a one-participant 401k* no later than 12/31. Otherwise the Roth conversion will be subject to pro-rata taxation.

While the advisor may have been technically correct with regards to the sales load issues. The downside of waiting years to do Roth conversions on non-deductible traditional IRA contributions. Is that the earnings are taxable. You really want to do the Roth conversions as soon as reasonably possible after the non-deductible traditional IRA contribution. However, in your current advisor situation that is not a good option because of the sales load.

There is really only one good solution. Take WCI's "Fire Your Financial Advisor!" online course** and well... Fire your financial advisor. You absolutely do NOT want to open your one-participant 401k plan through this avisor. Move all your taxable and tax-advantaged accounts to one of the low cost brokerages. Etrade, Fidelity, Schwab, TD Ameritrade and Vanguard all offer taxable, IRA, Roth IRA and one-participant 401k plans.

Fidelity, Schwab and Vanguard offer their own index funds with competitive expense ratios and no transaction fees. Etrade, TD Ameritrade support designated Roth 401k accounts. *Vanguard's Individual 401k does not accept rollovers from traditional IRA accounts.

There are many WCI forum members; ready, willing and able to help you with the transition. You future self will greatly appreciate your actions to preserve your wealth.

**I have no interest in or benefit from WCI's products. In fact, I seldom recommend any specific financial products or services, let alone from the sponsor of a forum I participate in. However, I consider this product and the actions advocated a public service.

[Hank]

Jeez, 5.75% front loaded fees? Probably for American Funds?

Run, don’t walk, away from this “advisor”.

[Ddoc]

We are in the process of moving everything over to vanguard (thinking of doing the 3 fund portfolio, 529s, Roths). I am considering Etrade vs vanguard for opening up the solo 401K depending on if I do the TIRA rollover (which I could do through Etrade and not vanguard).

We have been using First Command Financial advisors after a senior attending had highly recommended them. It was a good learning experience over the last 2 years, but we are ready to leave the shackled nest and take control of our own money.

I was apprehensive about first posting, but I can’t thank each of you enough. And yes, my husband and I are trying to find a weekend or time to set away to do the fire your financial advisor course.

[Hank]

Oh man, I remember when FirstCommand was USPA&IRA. Back then, they were preying upon company grade officers and senior NCOs. Contractual investing plans with a full 50% load on the first year’s contributions to the investment scheme. Icky.