Question about 401K, tax deferred annuity, and solo 401k

[socaintexas]

Please bear with me... I'm trying to learn.

The company I work for (w2 employee) has a retirement account with Mutual of America. I have a 401K and also a tax deferred annuity, which if I understand acts similarly to a 403b (due to being a highly compensated employee I have to contribute part of my money to that) with them.  I max out $18K (part to the 401K and part to the TDA) and they put in 12% of my salary to the 401K (which was about $28K last year and will likely be a little higher this year).  The fees in the TDA historically were higher but they passed a certain dollar amount so now they are the same (still on the high side which is a whole different topic).  I do not own any part of this company.

I also moonlight and had about $90K in 1099 income for 2016, which will likely be about $25k less this year. (Yes, I am dreading the call from my accountant regarding taxes).  I created mine and a spousal backdoor roth ira last week so I don't think I can do a sep-ira now. Would it be of benefit to open a solo 401K at this point (for 2017, I get that it's too late for 2016 tax purposes).  Can I do an employer contribution to it for the 20% (which may end up being about $13K this year), or will I be limited to a cap of $53K total due to the TDA?  (ex if I put in $18K this year and with a match of $30K = $48K  which would only leave $5K if that is the case).

Another question about a solo 401K.  As I said the fees in the TDA are relatively high.  Would it benefit to open a solo 401K anyway and contribute to it over the TDA?  If I put 4% of my salary in to 401K I still get the match, so that would leave about $10K I could put in a 401K and not in the TDA.

Also, I have about $35K from when I worked a few years for the state of Texas that is sitting in a retirement account (401A that I am not contributing to) It was earning 5% interest but I guess the legislature changed that to 2% in 2014 and I did not read the memo.  What are my options for moving that money?

FYI if it makes any difference. I am 46. I max out my HSA account and have that in TDAmeritrade.   I will be debt free in October (have 14K left on my mortgage).  I have not opened any accounts for my 7 year old twins' education.

 

Thanks if you have made it to this point!  I look forward to your responses.

[jfoxcpacfp]

1. You can contribute to a backdoor Roth IRA for 2016.


2. You can contribute to a SEP IRA for 2016 without affecting the taxability of the backdoor Roth (see no. 4 below)


3. You can set up a SOLO-k for the 2017 income and contribute 20% of net IC income. Your limit for 2017 is $54k across all accounts, if I understand your setup correctly, due to the 403b/TDA involvement.


4. Convert the SEP into the SOLO-k before 12/31/17 to avoid the pro-rats rule for the 2017 backdoor Roth conversion.


5. Convert the nondeductible 2016 TIRA into a Roth in 2017 (step 2 of the backdoor Roth)


6. Roll your old 401a into your SOLO-k

Your CPA should have been able to go over all of this with you when you got your taxes done. That's one reason you hire a professional.

See this blog post: Explaining Backdoor Roth IRAs

Good luck.

[socaintexas]

I already did the Roth conversion on the non-deductible tIRA.  Can I still do a SEP-IRA for 2016 without it being included in the aggregate?

 

[DMFA]

socaintexas wrote:

I already did the Roth conversion on the non-deductible tIRA.  Can I still do a SEP-IRA for 2016 without it being included in the aggregate?

 

Click to expand...

Yes, all that matters for pro-rata taxation of the conversion was the balance in pretax IRAs on 12/31/2016, which was zero.

[spiritrider]

From, your description, I believe your "

socaintexas wrote:

I have a 401K and also a tax deferred annuity, which if I understand acts similarly to a 403b (due to being a highly compensated employee I have to contribute part of my money to that) with them.

Click to expand...

From your description that the amount limited by being a HCE goes into the Tax Deferred Annuity (TDA), it is most likely a non-qualified deferred compensation plan. These assets are subject to the creditors of the employer, are not eligible to be rolled over to other retirement plans and typically have very restrictive withdrawal options that can dump tax liability in peak earnings years.

This TDA contribution would not be included in the employee deferral limit (2017 = $18K). The Solo 401k employee deferral would be limited to $18K - (W-2 employer 401k employee deferral) and the Solo 401k would have its own 54K annual addition limit (employee deferral + employer contribution). You could also make an employer contribution to the Solo 401k of 20% of your net self-employment income = net business profit - 1/2 SE tax.

If you get the full 12% employer match with a 4% contribution, that is what I would contribute to the W-2 employer 401k. I would then max out your Solo 401k employee deferral and employer contributions before contributing to the TDA.

Too further clarify on the SEP IRA. While the contribution will be treated for the 2016 tax year, it will be deposited in 2017. Therefore, it is not included in the pre-tax IRA balance on 12/31/16 for the 2016 pro-rata conversion and if it is rolled into the Solo 401k before 12/31/17 it will not be included for the 2017 pro-rata conversion.

 

[socaintexas]

Thanks all!

 

I just clarified with Mutual of America that the TDA is considered a tax sheltered annuity (403b).  In that case the most I could contribute for 2016 is ~8K, if I am understanding correctly, right?   $53K - ($27K + 18K) = $8K.

 

 

[jfoxcpacfp]

That sounds right (you had $28k originally).

[spiritrider]

Hmmm, interesting.

Johanna, when I have come across additional deferrals when an HCE is limited due to ADP failures. The additional deferrals were always to a non-qualified deferred compensation plan for key employees. However, I have never been familiar with circumstances with a 401k/403b combo.

Still, I'm surprised that if one qualified plan (401k) fails ADP testing, deferrals of the 402g balance can still be made to the the second qualified plan (403b). This seems to go directly against the tenets of the anti-discrimination rules.

[jfoxcpacfp]

spiritrider wrote:

Hmmm, interesting.

Johanna, when I have come across additional deferrals when an HCE is limited due to ADP failures. The additional deferrals were always to a non-qualified deferred compensation plan for key employees. However, I have never been familiar with circumstances with a 401k/403b combo.

Still, I’m surprised that if one qualified plan (401k) fails ADP testing, deferrals of the 402g balance can still be made to the the second qualified plan (403b). This seems to go directly against the tenets of the anti-discrimination rules.

Click to expand...

You know what? I'm not sure what you do for a living, but I would bet mucho dinero it's a step or more above my level of raw knowledge/experience so I will happly defer to you. So....what are you telling @socaintexas?

[spiritrider]

I'm wasn't really trying to confuse the OP. I'm sure the plan(s) know what they are doing. I was just wondering what your thoughts were on this fact pattern.

[jfoxcpacfp]

Ah! I just realized that I have gotten this thread combined in my mind with another thread you are commenting on involving the spouse. Lol, the end of tax season looms large.

I've never seen a 401k/403b combo, either, but that doesn't say much. Honestly, I've already given my thoughts on the fact pattern, and you further distilled them. Not sure what else there is for me to add. I consider it a compliment that you asked my thoughts and I understand what you're saying about the anti-discrimination rules, but I'm happy to leave that up to the plan administrator (and you). The last time I made HCE calculations was when I sat for the CFP exam.