Individual 401k question

[dantheman52188]

Hey WCI community!

I've spent the last 3-4 months delving into many of the topics on this amazing website (Thanks Dr. Dahle!), and getting my finances in order.  I have a quick question about the individual 401k for the sole purpose of obtaining a place for future rollovers (so to be able to participate in a backdoor Roth IRA in a few years).  I am currently in residency - and will likely be able to contribute to a Roth IRA for the next 2-3 years, but will then want to use the backdoor Roth.  I am moonlighting now, and this is done through an independent contractor (1099 tax form).  My questions are:

1. Do I even need to open up an individual 401k at this time?  I won't be able to contribute to it (still working on maxing out my 403b through work, and I am maxing out my Roth IRA).  Or should I expect to have a place to rollover my 403b money in the future and not worry about it.

2. Where is the best place to open one up?  I heard a rumor that Vanguard does not allow for outside rollovers into their i401k.  Is there a minimum balance I must maintain to keep the account open?

Thanks!

Dan

[spiritrider]

1. Technically, a self-employed individual can open a one-participant 401k in the first year they have net self-employment income or in a subsequent year even if they don't have net self-employment income in that year. I think it is far preferable to do the former rather than the latter.

2. Fidelity's Self-Employed 401k allows incoming IRA rollovers. While there is usually a $2,500 minimum investment in Fidelity funds, in the Self-Employed 401k, that is reduced to $500. I don't know that there is a minimum balance, but I think having A balance would help if there was ever any question that the 401k opening was a sham just to facilitate rollovers.

[ENT Doc]

Is the reason you say you can't contribute to it because you literally need the money or because you think you can't?  You can contribute the employer component to your i401k, which I do advise setting up if you'll be doing moonlighting/locums in the future and especially if the additional income puts you into the 25% bracket.  Set one up with Fidelity.  The allow roll-overs whereas Vanguard does not.  You could even set it up as a Roth i401k, but you'll still pay tax on it (which may be worth it if in a lower bracket).  The employer portion is maxed at 20% of net income (gross-expenses-deductible portion of FICA).  There is an IRS worksheet for this in Pub 560 or 590.

[dantheman52188]

@spiritrider
Perfect, that makes sense. I appreciate the recommendation to Fidelity.

@ENTdoc
Yeah I can't afford to put money into another retirement account at this time (two resident salaries). Only able to max out out employer matches and Roth IRAs. But I do like the idea of setting up a Fidelity i401k now while I'm actively moonlighting so that I can roll everything into that in the future. And it gives me the option of additional employer contributions like you said. Thanks!

[ENT Doc]

Do you live in a high COL area?  Kids?  Assuming no kids, with two resident salaries PLUS moonlighting you might be able to clamp down on expenses elsewhere to cover the employer contribution.  This may be a small amount after you do the math on it.  After taking out the $11k for Roth, $36k for max contributions for both of you, taxes, and assuming something like 10k of moonlighting money, you'll still have ~5k a month in operating income.  Do you need this?

[dantheman52188]

The moonlighting is my travel fund   ops: .  But otherwise you would be correct in your calculations.  I think my living expenses before pre-tax, Roth IRA, and loan contributions are around $4k/month.

[ENT Doc]

You should be able to put away the employer portion.  Live like a resident!  :-)

[spiritrider]

At least adopt a plan and contribute $500. You can't tell me there isn't a way to contribute at least that amount.

[dantheman52188]

Maybe I wasn't being overly clear on my current contributions. I will be contributing the match max to my 403b and my wife's 401k, and also maxing out both our Roth IRAs - total of about $25k in retirement contributions. We put $1000 to loans monthly to take care of interest and some principle. We are also putting money towards our future house down payment and emergency fund each month. You are all correct in saying I can allocate funds differently but that wasn't really my original question. I absolutely appreciate the feedback - and you are right I could move things around to make $500 contributions to the individual 401k, but I was more interested in finding out if opening it now with minimal funding was the smart move since I only plan on moonlighting for the next 2-3 years. It would really serve as a location for future employer retirement plan rollovers.

Again, I appreciate everyone's comments and feed back!

[jfoxcpacfp]

dantheman52188 wrote:

...interested in finding out if opening it now with minimal funding was the smart move since I only plan on moonlighting for the next 2-3 years. It would really serve as a location for future employer retirement plan rollovers.

Click to expand...

If you will be moonlighting as an IC for the next few years, there is no nend to open the SOLO-k now just to have one open.

[DMFA]

Do you have any traditional, SEP, or SIMPLE IRAs? Those are all that hinder the backdoor Roth. If you don't, then your initial purpose for your question is moot. 401(k) and 403(b) have nothing to do with that since they are not IRAs.

If you're maxing your employer account with elective deferrals ($18,000), then you can only make employer contributions to an indie 401(k) up to a max of 20% of net profit (income, minus expenses, minus half self-employment tax). Further, if you have a 403(b), then the sum of *all* 401(k) and 403(b) conditions must be <= $54,000.

So in your situation with no pretax IRAs, unless you want more tax-deferred retirement savings to get to your goal rate (ideally 20-25% or more), you don't *need* an individual 401(k) at the moment. You could probably rollover any old employer accounts into your future ones, but that's not really a necessary step, especially if you have good fund options...but yes, you *could* open one, just ensure it's with a custodian which accepts incoming rollovers (Vanguard doesn't).

[dantheman52188]

DMFA wrote:

Do you have any traditional, SEP, or SIMPLE IRAs? Those are all that hinder the backdoor Roth. If you don’t, then your initial purpose for your question is moot. 401(k) and 403(b) have nothing to do with that since they are not IRAs.

If you’re maxing your employer account with elective deferrals ($18,000), then you can only make employer contributions to an indie 401(k) up to a max of 20% of net profit (income, minus expenses, minus half self-employment tax). Further, if you have a 403(b), then the sum of *all* 401(k) and 403(b) conditions must be <= $54,000. So in your situation with no pretax IRAs, unless you want more tax-deferred retirement savings to get to your goal rate (ideally 20-25% or more), you don't *need* an individual 401(k) at the moment. You could probably rollover any old employer accounts into your future ones, but that's not really a necessary step, especially if you have good fund options...but yes, you *could* open one, just ensure it's with a custodian which accepts incoming rollovers (Vanguard doesn't).

Click to expand...

Excellent, that makes sense.  I do not have any of those IRAs as you mentioned, so shouldn't be hindered from performing backdoor Roth IRAs in the future.  I guess you are right - the only advantage to opening an i401k would be to expand tax deferred space (which I cannot afford right now anyway).  I do have good funds in my 403b and wife's 401k, so they could always serve as future locations for rollovers.  Thanks for your response!