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SEP IRA and pro rata

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  • SEP IRA and pro rata

    Independent contractor who just established an LLC.  I will be paid through it for the 2017 year.

    I am trying to decide whether to set up a SEP IRA or Solo 401k.

    If my LLC contributes the max amount to my SEP IRA, does that prohibit me from investing in a back door Roth IRA due to pro rata?

    If so, I was thinking it would be in my best interest to set up the solo 401k so I can still max out a Roth IRA.

     

    Any insight welcomed.  Thanks!

  • #2
    Yes! Good catch. The SEP-IRA will be subject to the pro-rata rule.

    Go with the Solo 401(k) and the back door will remain open.

    Cheers!

    -PoF

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    • #3
      Agree with PoF!

      The Solo 401(k) is the way to go.

      Comment


      • #4
        My experience is very limited, but I'm hard-pressed to find a situation in which a SEP-IRA is superior to a solo-401k...can anyone fill me in?

        Comment


        • #5
          I can think of two situations that would be useful where you are already using up your deferral limit through W-2 employment.

          1. You want to have the ability to access the money other than the narrow hardship rules. Most solo 401k plans do not allow in-service withdrawals/rollovers.

          With a SEP IRA, you can make a SEP IRA contribution and immediately do a Roth conversion. IF/when the five year rule is met for Roth IRAs, you can withdraw conversions at anytime tax/penalty free.

          2. Vanguard does not allow the purchase of Admiral Shares in their i401k plan, but do allow this in SEP IRAs and other IRAs. This is  significant difference in expense ratios.

          NOTE: SEP IRA assets not converted to a Roth IRA would make attempting a backdoor Roth a mostly a non-deductible IRA exercise.

           

          Comment


          • #6




            I can think of two situations that would be useful where you are already using up your deferral limit through W-2 employment.

            1. You want to have the ability to access the money other than the narrow hardship rules. Most solo 401k plans do not allow in-service withdrawals/rollovers.

            With a SEP IRA, you can make a SEP IRA contribution and immediately do a Roth conversion. IF/when the five year rule is met for Roth IRAs, you can withdraw conversions at anytime tax/penalty free.

            2. Vanguard does not allow the purchase of Admiral Shares in their i401k plan, but do allow this in SEP IRAs and other IRAs. This is  significant difference in expense ratios.

            NOTE: SEP IRA assets not converted to a Roth IRA would make attempting a backdoor Roth a mostly a non-deductible IRA exercise.

             
            Click to expand...


            I think you mean a taxed exercise, not a non-deductible exercise, since the backdoor Roth conversion (using a TIRA at $5,500/year) is already non-deductible.

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            • #7
              Well, you can look at it either way. Either the conversion becomes a significantly greater taxable exercise, or it becomes significantly a non-deductible contribution that remains behind.

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