SEP-IRA for 2016

[Franky]

First of all, thank you for the great teaching and information.  Really invaluable for newbies like myself.

I'm fortunate to have a reasonable employee/partner income from my w2 job, and a good side income from my 1099 consulting work.  I currently contribute the max allowable to my employer sponsored 401k plan ($18k per year) from my annual salary, and my group makes the maximum allowed profit sharing contribution of $15.9k/year.   My employer/physician group (where I am a partner and an employee), also has a cash balance/defined benefit plan.  I have been contributing $20k/year for the past 2 years to this defined benefit  plan from the profit-sharing/bonus component of my W2 income (I believe that for my age, the current annual limit per year is about $66k). 

 First, from what I’ve read, the above employer/group-sponsored defined benefit plan does not impact my ability to contribute from my 1099 income to a solo 401k, or to a SEP-IRA? From the information that I've read, I would not be able to contribute any additional money from my 1099 work to the salary deferral portion of my solo 401k  (or SEP-IRA) as I'm already at the 18k maximum, but can I still contribute to the profit sharing component of it to max that out to $53k (given my current primary job's 401k and defined benefit plan contributions)?

Also, I goofed and it sounds like its too late to establish and contribute to a personal 401k for the 2016 tax year.  But what about establishing a SEP-IRA now (March 2017) for the 2016 tax year and contributing the max to it for 2016?   I believe I still have until April 15th to do this?

[spiritrider]

Yes, you can open and fund a SEP IRA for the 2016 tax year until your tax filing deadline (4/18/17) including extensions (10/16/17). Just so you know, there are no employee deferrals to a SEP IRA even if you had space remaining in the deferral limit.

Also, it is not clear to me that you understand that while the $18K employee deferral limit is across all qualified plans, the employee + employer annual limit (2016 = $53K, 2017 = $54K) is per employer. Your employer's 401k contributions would not be aggregated with either one-participant Solo 401k or SEP IRA contributions.

Finally, do not make any SEP IRA contributions for the 2017 tax year if you wish to use a Solo 401k for the 2017 tax year. You can adopt the Solo 401k plan at anytime. Just be sure and make the effective date 1/1/2017, so it will be based on the entire year's compensation. After you make the SEP IRA contributions for 2016 and have opened the Solo 401k, you can rollover the SEP IRA to the Solo 401k at anytime. Just make sure you use a plan at a custodian that accepts such rollovers, Vanguard does not.

 

[Franky]

Thank you very much for the excellent advice!

Just to make sure I understand, my contributions to my employer's defined benefit plan (cash balance plan) also do not impact my contribution limits to my solo 401k or SEP IRA?

 

 

[DMFA]

Franky wrote:

Thank you very much for the excellent advice!

Just to make sure I understand, my contributions to my employer’s defined benefit plan (cash balance plan) also do not impact my contribution limits to my solo 401k or SEP IRA?

 

 

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The DBP does not affect SEP-IRA or 401(k). However, as mentioned above, don't do SEP and indie 401(k) for the same business in the same year.

• Open SEP-IRA for 2016 (prior to 4/18/2017)


• Contribute up to 20% of 2016 self-employed net profit (income - expenses - half of self-employment tax) to the SEP-IRA for 2016


• Open an indie/solo 401(k) at an institution which allows incoming rollovers (unlike Vanguard)


• Roll your 2016 SEP (and any other pre-tax IRAs) into your indie 401(k)


• Continue to max out your employer 401(k) account for elective deferrals aka "employee" contributions ($18,000)


• Contribute 20% of 2017 self-employed net profit (income - expenses - half of self-employment tax) as "employer" contributions to the indie 401(k) for 2017


• Do a backdoor Roth IRA (non-deducted traditional IRA contribution followed by a Roth conversion) in/for 2017

...clear as mud?

[Franky]

That is SUPER helpful, thank you!!

Just to clarify, I have already completed my backdoor Roth conversions (via a traditional non-deductible IRA) for both 2016 and 2017.  But from what I understand, this should not be an issue as long as on December 31st of each year there are zero dollars in my non-Roth IRAs? If so, could I keep my backdoor Roth-converted post-tax dollars where they are in a dedicated Vanguard Roth IRA fund, or do I need to roll those over into my new solo 401k as well?

Much obliged

[DMFA]

Right: the only day the balance matters vis-à-vis the pro rata rule is 12/31 of the year of the conversion.

Keep Roth in Roth. The only thing that would need to be rolled into the 401(k) in your situation is the SEP-IRA.

[Franky]

Thank you!

Just for everyone’s information, I spoke to my Vanguard “small business representative” today, he did not know anything about the pro rata issue and the SEP-IRA closing the door on the backdoor Roth conversion…gave me blatantly false advice on this. So than YOU guys for setting it straight

 

[DMFA]

Franky wrote:

Thank you!

Just for everyone’s information, I spoke to my Vanguard “small business representative” today, he did not know anything about the pro rata issue and the SEP-IRA closing the door on the backdoor Roth conversion…gave me blatantly false advice on this. So than YOU guys for setting it straight

 

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It blows me away how many professionals, including some CPAs, (though idk the background of to whom you spoke) are clueless about it.  I figured it was bread-and-butter stuff.

Totally different scale and complexity, I know, but I guess lots of non-doctors feel the same way about us when doctors end up clueless about seemingly simple stuff.