Employee and IC retirement question

[greensaver]

I am an employee with a group that has a 401k plan that I max out. I also do a back door Roth IRA and spousal Roth IRA at $5500 each. I secondarily moonlight as an IC with another group. Just to be sure – I can contribute 25% of my IC income to a SEP-IRA (up to $50k-ish) which will be tax-deferred and taxed after I take it out at my new tax rate when I’m over 59.5 yo?

[HandFellow]

If I'm not mistaken, you can't have any other IRAs if you want to do the back door conversion.  That's the Pro Rata problem.  But you could open a solo 401k and do what you are talking about instead of the SEP.  Otherwise, you are correct.

 

[PhysicianOnFIRE]

Yes, choose individual 401(k) rather than SEP-IRA to keep the backdoor Roth option open. WCI has written about the two: SEP-IRA VS Solo 401K.

 

[DMFA]

greensaver wrote:

I am an employee with a group that has a 401k plan that I max out. I also do a back door Roth IRA and spousal Roth IRA at $5500 each. I secondarily moonlight as an IC with another group. Just to be sure – I can contribute 25% of my IC income to a SEP-IRA (up to $50k-ish) which will be tax-deferred and taxed after I take it out at my new tax rate when I’m over 59.5 yo?

Click to expand...

Do an individual 401(k).  This will not interfere with pro rata taxation of non-deducted Traditional IRA conversions like a SEP IRA will.

The amount you can contribute is the same; the ratio is still 4:1 earnings:contributions, since contributions lower the earnings.  For example, 20% of the whole is still equal to the smaller portion being 25% of the larger portion (.2 ÷ .8 = .25).  In fact, it'll actually come out to more like 18.6% of total earnings, since the contribution is figured as earnings, minus expenses, minus half of self-employment tax...but now we're in the weeds.

Individual 401(k)s are low cost and can serve as a "bucket" for you to roll any other pre-tax accounts (like other 401(k) or 403(b) accounts) instead of a Traditional IRA, which would further cause pro rata taxation of non-deducted contributions at conversion.  Ensure your custodian allows incoming rollovers; Vanguard doesn't, silly them...

[jfoxcpacfp]

greensaver wrote:

I am an employee with a group that has a 401k plan that I max out. I also do a back door Roth IRA and spousal Roth IRA at $5500 each. I secondarily moonlight as an IC with another group. Just to be sure – I can contribute 25% of my IC income to a SEP-IRA (up to $50k-ish) which will be tax-deferred and taxed after I take it out at my new tax rate when I’m over 59.5 yo?

Click to expand...

Well, yes, you can contribute 25% of your IC income to a SEP. However, as others have pointed out, it will mess with the backdoor Roth conversion and cause you to owe taxes, which is unnecessary. It is too late for you to set up and contribute to a SOLO-k for 2016 (the door closed on 12/31/16) but here's what you need to do:

1. Contribute as much as is legally possible to the SEP for 2016 (no later than 10/15/17).


2. Set up a SOLO-k for the year 2017 based upon having IC income in 2017.


3. Roll the SEP into the SOLO-k before 12/31/17 (and close the SEP - you won't need it any longer).


4. Continue with your backdoor Roth strategy.


5. Use the SOLO-k going forward to make retirement contributions based upon your IC income. Your due date to contribute to the SOLO-k will be 4/15 rather than 10/15, which is the only downside. It's all good from there on out.


6. Except for one minor snag - when your SOLO-k reaches a balance of $250k+, you must file an annual 5500-EZ. Fairly simple to do.