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Rollover IRA conversion to Roth vs solo-401k

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  • Rollover IRA conversion to Roth vs solo-401k

    Hey everyone,

    I have a fairly basic scenario to bring up, and I am looking for some advice. Also, I want to make sure I'm looking at things correctly here. I'm halfway through my intern year and looking at 2016 taxes (married, filing jointly). My wife has a small amount, $3,700, in a rollover IRA at Vanguard from a past job 401k. She's now staying at home with our daughter but still is making some side money reported on a 1099. I'm looking at what would be best to do with this money as I would like to be set up to be able to do backdoor roths for both of us after I get done with residency.

    The way I see it, there's two options as I put in the title (please let me know if I'm missing any other options or specific details).

    1. Roth conversion: With only half a year of my salary and wife not having a very substantial income in 2016, this is the absolute lowest our income is going to be for the rest of our lives. The taxes would therefore be the most manageable compared to possibly doing this in future years. Plus getting even a little more money into a roth at this stage would be helpful. It would be an easy transfer to her Vanguard roth IRA. In this case, I would have to fill out a Form 8606 in order to report it, correct? Anything else?

    2. Set up an individual 401k due to the small amount of income she is making. Wouldn't have to worry about taxes this year or ever (until withdrawal obviously). From reading, Vanguard doesn't allow this type of transfer, so I'd have to go with a different company (not a huge deal). I'm just starting to read about these and all the fine print, so if there's something I'm not seeing, let me know.

    Which would you guys go with? I know we're not talking about a lot of money, and there may not be a right or wrong answer here in that case.

    Thanks!

  • #2
    Assuming you have enough other income. Consider doing both.

    1. I would convert the traditional IRA to a Roth IRA.

    2. Set up an individual 401k and make the maximum employee deferral you can afford.

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    • #3
      Do both. Pay the tax on that small conversion and make the max individual 401k contribution she can make for her 1099 income.

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