Simple IRA for S corp shareholder with backdoor Roth

[Guest]

My spouse has an independent medical practice with three employees. She was sole prop. for 2016 but we changed to S corp for 2017. We do routine backdoor Roth IRA contributions.

Retirement plan issues:

Can we have a simple IRA for the practice, where my spouse can contribute while maintaining contributions for backdoor Roth? In other words, is Simple IRA for business treated as a separate entity from personal IRA so both can be maintained?

I am choosing simple ira for its simplicity & low cost of operation.

[jfoxcpacfp]

wci wrote:

My spouse has an independent medical practice with three employees. She was sole prop. for 2016 but we changed to S corp for 2017. We do routine backdoor Roth IRA contributions.

Retirement plan issues:

Can we have a simple IRA for the practice, where my spouse can contribute while maintaining contributions for backdoor Roth? In other words, is Simple IRA for business treated as a separate entity from personal IRA so both can be maintained?

I am choosing simple ira for its simplicity & low cost of operation.

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No, sorry. SIMPLEs and SEPs are hybrid retirement accounts. They are considered employer accounts for contribution limits but personal IRAs for purposes of the pro-rata rule.

[DMFA]

There seem to be very few instances when a SEP-IRA or SIMPLE-IRA are better than a solo 401k.

[Rb52dds]

If you own an S Corp I don't think you can do a solo401k? I'm in a similar situation. We started an office Simple IRA and it's messing up my backdoor Roth. I was told I can't do a solo 401k I can only do something if I provide it for my employees too (12 including another doc... ). I still haven't figured this out.

[Guest]

Apparently, no solo 401k w employees. So, only option is small business 401k or let go backdoor roth and do simple IRA. Small 401k plans cost $2000 or more/year to operate.

[jfoxcpacfp]

Anonymous wrote:

Apparently, no solo 401k w employees. So, only option is small business 401k or let go backdoor roth and do simple IRA. Small 401k plans cost $2000 or more/year to operate.

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That's correct. You and @Rb52dds will have to weigh the lost opportunity costs of contributing to a SIMPLE or SEP (+employee contributions) against the benefits of the backdoor Roth and the ongoing cost of 401k administration.

[spiritrider]

Even if you wanted to, it would be too late for a safe harbor 401k plan for next year. If you could get a plan adopted in the next 11 days (doubtful), you still don't have enough time to provide the required 30-90 days notice. Also, since a SIMPLE IRA must be a calendar year plan, you can't switch to the 401k during the year.

[jfoxcpacfp]

spiritrider wrote:

Even if you wanted to, it would be too late for a safe harbor 401k plan for next year. If you could get a plan adopted in the next 11 days (doubtful), you still don’t have enough time to provide the required 30-90 days notice. Also, since a SIMPLE IRA must be a calendar year plan, you can’t switch to the 401k during the year.

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SIMPLE IRAs must be set up no later than October 1 to start a SIMPLE by 1/1/17. That doesn't mean you can't still set up a SIMPLE in 2017, just that you have to wait 92 days from the current date to set it up, due to the employee notification requirement.

[litovskyassetmanagement]

Anonymous wrote:

My spouse has an independent medical practice with three employees. She was sole prop. for 2016 but we changed to S corp for 2017. We do routine backdoor Roth IRA contributions.

Retirement plan issues:

Can we have a simple IRA for the practice, where my spouse can contribute while maintaining contributions for backdoor Roth? In other words, is Simple IRA for business treated as a separate entity from personal IRA so both can be maintained?

I am choosing simple ira for its simplicity & low cost of operation.

Click to expand...

There are other important considerations for having a SIMPLE IRA vs. having a 401k plan.  This article provides more detail on this important topic:

http://www.dentaltown.com//Dentaltown/Article.aspx?i=403&aid=5625

Backdoor Roth can indeed be an issue with a SIMPLE, but you can always contribute into a non-deductible Traditional IRA until such time that you are able to do a 401k plan.  For some doctors SIMPLE IRA might always be a better plan though, so there are advantages and disadvantages to having a SIMPLE IRA.  If you can contribute $53k + $20k for the spouse and your employer contribution is reasonable vs. the cost, a 401k plan would be a better idea.  If however you can contribute no more than about $40k for yourself and spouse, a SIMPLE might be a winner.  Yes, you do give up the Roth salary deferral and Roth conversions as well as backdoor Roth, so that's one of the key decisions to make when deciding on which plan to open.  Most doctors though might start with a SIMPLE and then convert to a 401k plan, in which case they can convert the non-deductible Traditional IRA to Roth after they move all of their SIMPLE assets into their 401k plan.

[litovskyassetmanagement]

Rb52dds wrote:

If you own an S Corp I don’t think you can do a solo401k? I’m in a similar situation. We started an office Simple IRA and it’s messing up my backdoor Roth. I was told I can’t do a solo 401k I can only do something if I provide it for my employees too (12 including another doc… ). I still haven’t figured this out.

Click to expand...

The question is whether the employer contribution is reasonable vs. the cost and the fact that you will not be able to make a tax-deferred contribution which can be as high as $53k plus $20k or so for the spouse.  This question can only be answered with a design study.  For one thing, if you have a doctor who is not an owner, they can be excluded from the plan (or excluded from just the profit sharing/matching, while allowed to contribute the salary deferral).  Also, some classes of employees can be excluded from the plan.  If your employees are significantly older than you are (and are relatively highly compensated) then this can create a problem with respect to employer contribution, but until a design study is done it is impossible to say whether a 401k plan would be better for you than a SIMPLE IRA.

As I mentioned above, this link will provide you with some ideas as to what's involved in making this decision:

http://www.dentaltown.com//Dentaltown/Article.aspx?i=403&aid=5625

But ultimately, you will need to have an illustration/design study done for your practice to know for sure.  In some cases the employer contribution can be reasonable and a plan can be designed cost-effectively.  In other cases the employer contribution is too high, so a SIMPLE would work better.

[Rb52dds]

If my spouse has a 403b, 457, HSA and pension that are Maxed out they are not allowed to participate in a 401k for the practice right? My understanding thus far is my spouse can also do a backdoor Roth. We pretty much are able to put 100% of my spouses income into retirement accounts and all I have is a Simple IRA and terrible taxable options. We have the option to do Roth 403b and Roth 457 instead of traditional like we have now for my spouse but they may not have enough earned income. It so frustrating as a practice owner not to have good savings options. I'm going to knock out some debt before I take the office 401k plunge. Hearing how wci can invest so much in retirement accounts makes me jealous. I'd love to get a side gig going to be able to do a Solo 401k. We got a late start saving because we were getting my practice up and running. Now we are trying to save aggressively and it's tough to do.

[DMFA]

If you have a 403b, then you're capped at $53,000 in contributions totaled across all 401k's and 403b's.  If it's just 401k's, then it's $53,000 per unrelated employer (for example, one for a W-2 employer and one for your solo).  Elective deferrals are capped at $18,000 for all 401k's and 403b's combined, so most solos will be in the form of "employer" contributions.

Depending on your bracket, Roth 403b and/or 457 *may* not be the best choice for you if you'd get a massive deduction, but if you're looking to minimize your retirement tax bracket (i.e. trying to get 15% so your LTCG taxes are 0) it might be useful.  If your spouse is maxing 403b, 457, HSA, and Roth IRA, then I'm going to assume your bracket is *probably* high enough to make the tax deduction now worth it.

As long as an individual doesn't have any *non-Roth* IRAs (trad, SEP, SIMPLE) they can do the Backdoor Roth.  Your having a SIMPLE does not affect the taxability for your spouse's conversion (the I is for Individual).

Taxable accounts are not terrible.  They have a few advantages over the tax-deferred accounts and can be better than a tax-deferred account with lousy options.

As Konstantin says, the best decision is going to require a fairly detailed design study.  It might be worth your time and effort to figure that one out.

[litovskyassetmanagement]

Rb52dds wrote:

If my spouse has a 403b, 457, HSA and pension that are Maxed out they are not allowed to participate in a 401k for the practice right? My understanding thus far is my spouse can also do a backdoor Roth. We pretty much are able to put 100% of my spouses income into retirement accounts and all I have is a Simple IRA and terrible taxable options. We have the option to do Roth 403b and Roth 457 instead of traditional like we have now for my spouse but they may not have enough earned income. It so frustrating as a practice owner not to have good savings options. I’m going to knock out some debt before I take the office 401k plunge. Hearing how wci can invest so much in retirement accounts makes me jealous. I’d love to get a side gig going to be able to do a Solo 401k. We got a late start saving because we were getting my practice up and running. Now we are trying to save aggressively and it’s tough to do.

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That's a good idea by the way.  Get rid of as much debt as possible so that you are very comfortable maxing out your 401k.  Another thing.  The order of investment contributions doesn't matter much if you are setting aside large amounts and are a good saver.  So you start with after-tax contributions, and that's also a great idea.  In fact, after-tax portfolio is probably the most important one after the tax-deferred one.  It has a supporting role.  Not only will it have to produce the necessary income safely, but it is also the one that will pay for any Roth conversions that you might want to do to make sure that your RMDs are not excessive past age 70 (and this will also result in a significantly lower tax bill).  Once you pay the debt down and build up after-tax, then you can do a 401k plan and if you are older you can also do a Cash Balance plan for your practice.  When properly set up you can also minimize employer contribution and have a sizeable contribution yourself (and your spouse) so you are never going to be 'late' for anything.  With doctors and dentists, contribution window is fairly small because they start out with lots of debt, but the ceiling is a lot higher given your retirement plan options especially when you have your own practice.