if maxed 18k into w2 job's 401k, best option for 1099 additional retirement?

[Ornela]

I maxed out contribution through my w2 job for 2016 (no employer matching). I contributed 5500 to IRA which is being converted to ROTH.

Also I made 50k in 1099 income but did not contribute into retirement form it.  As of now I owe 17K in taxes. Is there still time to set up any type of retirement form 1099 income and lower tax bill somewhat? Is SEP an option? My accountant said since maxed 18k I am not eligible for more contributions as my 1099 income is through a sole proprietor LLC. Is this correct?

thank you

[jfoxcpacfp]

Ornela wrote:

I maxed out contribution through my w2 job for 2016 (no employer matching). I contributed 5500 to IRA which is being converted to ROTH.

Also I made 50k in 1099 income but did not contribute into retirement form it.  As of now I owe 17K in taxes. Is there still time to set up any type of retirement form 1099 income and lower tax bill somewhat? Is SEP an option? My accountant said since maxed 18k I am not eligible for more contributions as my 1099 income is through a sole proprietor LLC. Is this correct?

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That is not correct. And being a sole proprietor, LLC or not, is irrelevant. grrrrrrrr.

You have until 10/15/17 to contribute 20% of your net earnings from 1099 income into a SEP as long as you did no backdoor Roth conversions in 2016. If you did do a backdoor Roth conversion in 2016, you need to recharacterize it and do the backdoor Roth conversion in 2017, set up a SOLO-k in 2017, and roll the SEP into the SOLO-k in 2017. This assumes you will have additional IC income in 2017 to allow for the SOLO-k.

If your accountant had had the foresight to have you set up a SOLO-k in 2016, this would have been much simpler.

[spiritrider]

jfoxcpacfp wrote:

That is not correct. And being a sole proprietor, LLC or not, is irrelevant. grrrrrrrr.

You have until 10/15/17 to contribute 20% of your net earnings from 1099 income into a SEP as long as you did no backdoor Roth conversions in 2016. If you did do a backdoor Roth conversion in 2016, you need to recharacterize it and do the backdoor Roth conversion in 2017, set up a SOLO-k in 2017, and roll the SEP into the SOLO-k in 2017. This assumes you will have additional IC income in 2017 to allow for the SOLO-k.

If your accountant had had the foresight to have you set up a SOLO-k in 2016, this would have been much simpler.

Actually, any backdoor conversions in 2016 would not be affected by any 2016 SEP IRA contributions made in 2017. What matters for pro-rata Roth conversion considerations is what any pre-tax IRA (traditional, SEP, SIMPLE) balances were on 12/31/2016. Therefore, there is no need to recharacterize any 2016 Roth conversions, because of SEP IRA contributions made in 2017 even if made for the 2016 tax year.

However, any SEP IRA contributions made in 2017 would need to be no longer in the account on 12/31/20017 to eliminate/reduce any pro-rata taxation on the backdoor Roth contribution/conversion. To accomplish this you would rollover the SEP IRA contributions to either your employer's plan (if it accepts them) or a Solo 401k (if it accepts them, Vanguard does not).

Also, it is not actually necessary to have net self-employment income in 2017 to adopt a solo 401k plan, if you have had net self-employment income in any prior year.

You should perform the following steps:

1. As Johanna said, open and make a SEP IRA contribution of up to 20% of 2016's net self-employment income by your tax filing deadline (04/18/17) or if you file an extension (10/16/17).


2. If you will have net self-employment income in 2017 and/or your employer's plan does not accept incoming IRA rollovers or you will have lower expense ratios in a Solo 401k, Adopt a solo 401k plan. Be sure to make the effective date 01/01/17, to allow all net self-employment income for the entire year to be the basis for contributions.


3. If you open/will open a Solo 401k for 2017+, do not make any SEP IRA contributions for the 2017 tax year. This is because you can not make contribution to a 5305-SEP and a Solo 401k at the same time.


4. Rollover the SEP IRA balance and any other pre-tax IRA balances to either the employer's plan or the Solo 401k, which ever is better before 12/31/17.


5. Make your 2017 non-deductible traditional IRA contribution and Roth conversion anytime during 2017.

[jfoxcpacfp]

spiritrider wrote:

Actually, any backdoor conversions in 2016 would not be affected by any 2016 SEP IRA contributions made in 2017. What matters for pro-rata Roth conversion considerations is what any pre-tax IRA (traditional, SEP, SIMPLE) balances were on 12/31/2016. Therefore, there is no need to recharacterize any 2016 Roth conversions, because of SEP IRA contributions made in 2017 even if made for the 2016 tax year.

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You know, I actually wondered if (hoped) you would step in and comment on this. It came up with a client the other day and I'm nervous about recommending the conversion if the SEP is contributed for the tax year 2016 even though after the eoy. Could you give me a cite on this? According to the tax return, the funds will have been contributed as of 12/31 for tax purposes. If you could, I would really appreciate it and be a lot more comfortable.

[spiritrider]

Form 8606 Instructions, Line 6. Enter the total value of all your traditional, SEP, and SIMPLE IRAs as of December 31, 2016, plus any outstanding rollovers. A statement should be sent to you by January 31, 2017, showing the value of each IRA on December 31, 2016.

Only recharacterizations can change the amount reported on Form 5498. The SEP IRA contributions in 2017 (even for 2016) would not be reported on 2016's 5498. SEP IRA contributions are for a specific tax year, but are treated as contributed in the year they are actually made.

Reference the 2016 Instructions for Forms 1099-R and 5498, page 23, Top left column.

Box 8. SEP Contributions

Enter employer contributions made to a SEP IRA (including salary deferrals under a SARSEP) during 2016, including contributions made in 2016 for 2015, but not including contributions made in 2017 for 2016. Trustees and issuers are not responsible for reporting the year for which SEP contributions are made. Do not enter employee contributions to an IRA under a SEP plan. Report any employee contributions to an IRA under a SEP plan in box 1. Also include in box 8 SEP contributions made by a self-employed person to his or her own account.

Another consequence of this is that "Active Participant" status of SEP IRA contributions occurs in the year the contribution is made. For example, if a taxpayer exceeded the 2016 traditional IRA deduction income limits, a taxpayer could take the deduction for a 2016 traditional IRA contribution, even if they made SEP IRA contributions for 2016, but actually in 2017 and had no contributions to an employer retirement plan in 2016.

This is unlike a Solo 401k, traditional/Roth IRAs, where all contributions are for the taxable year, regardless of when they are actually made.

 

[jfoxcpacfp]

Very, very helpful, thanks so much!