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Solo401k with max 403b contribution

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  • Solo401k with max 403b contribution

    I am employed by a academic institution (W2 income) where I will put the max 19,500 plus match of ~8800 from employer. The plan also allows me to do after tax contributions and then immediately do Roth in plan conversions to the max 403b limit of 58,000 for this year.

    I also do consulting work for which I am paid a 1099. In prior years the 403b did not allow for after tax contributions so I did a SEP IRA contribution for the 1099 and then rolled it into the 403b plan to be able to do the back door Roth IRA contribution, making sure that the total 403b+SEP contribution stayed below the 415c limit for that year. This year I will be doing the max after tax contributions to the 403b so will hit my 415c limit of 58,000.

    My question is what options do I have for tax advantaged space with the 1099 income? I recently got a major consulting project so I anticipate the 1099 income will be larger than ever before and may be between 150-200k this year. Am I correct to assume the after tax contribution amount is counted in the 415c limit?

    Slightly unrelated but in addition I don’t believe I am eligible for doing the QBI deduction on the 1099 since consulting is specifically excluded correct? Is there someway I could recharacterize the 1099 to be eligible for the QBI? My W2 income puts me above the income limit for the QBI deduction I believe.

  • #2
    Correct, in the scenario as presented, your after-tax contribution will be included in the total so you will not have any space left to contribute to your solo-k (recommend you close the SEP, open a solo-k). However, given your perceived high tax bracket, why not contribute the max PS to your solo-k then whatever space you have left to the NRAT (non-Roth after tax)?

    Yes, this will require you to do a rough calc before you file your taxes (which your CPA s/b to help with) but I’d recommend estimating the NRAT contrib conservatively. Iow, if you calc you can contribute $20k to the solo-k as PS, then contribute $8k to your NRAT, bringing you up to $56,300 total (hope this is right, I am calculating in my head). That gives you $1,700 space to account for the Medicare and sch C reductions in your allowable solo-k PS contrib.

    DO NOT just go by my calc’s - this is an example only. But if it were to play out, you would sub a $20k deduction for a $20k NRAT.

    NOW, if you are leaning more toward building up your Roth during your career, you can skip the above and just fill out the NRAT.

    There could be many mitigating factors that you and your CPA should discuss. I’m presenting only a very basic example.

    re: your last q: your 1099 results are eligible for QBI, but, as a SSB, it appears they may be phased out due to your income level.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      Thanks for confirming that I was thinking. What you suggested is what I was thinking about too. I’m definitely in the top tax bracket so the question of whether to take the extra Roth space since it is available or max out my pretax contributions is a big part of the decision making. My thought of going with the Roth was for tax diversification purposes. Between my wife (non physician but she has a plan that lets her get the max into her 401k annually but only as pretax) and I we will be putting ~120,000 into pretax this year plus the 12,000 backdoor Roth. The decision is what to do with the extra ~29,000 tax advantaged space. My thought was to put it into Roth to build up that bucket since we will likely be near the top tax bracket in the future when we are in retirement. We will also put any extra this year into taxable plus making 529 contributions for kids to get the max state tax deduction. The extra tax deduction of doing a solo 401k and putting the 29,000 there is nice and I would invest the extra take home into taxable but we will really have minimal Roth accounts at retirement that way.

      I have a non governmental 457b that I put the max 19,500 into annually. At separation from my employer I have three options for taking the distribution: lump sum, over ten years starting immediately or over ten years starting at a date of my choosing. I can change the date one time after picking. My thought was to draw down the 457 during early retirement and do some Roth conversions at that time.

      I am conflicted on my choice of extra tax deduction now with the extra invested in taxable or extra Roth space now.


      • #4
        In general, there are two things to keep in mind for individuals in this situation:
        1. If eligible for the QBI deduction, pre-tax contributions to an employer retirement plan reduces* QBI.
        2. Self-employed employer contributions are not compensation and the decreased compensation and the contribution itself can reduce** available annual addition space.
        *If eligible for the QBI deduction, the effective tax savings of the pre-tax contribution is based on 80% of the taxpayer's marginal ordinary income tax rates.

        **It does not apply to the OP, but in cases where the self-employed earned income is < (the annual addition limit / 80%). Total annual additions are reduced by the employer contribution.

        In one and/or the other case, it may be more beneficial to forgo employer contributions and maximize employee after-tax contributions.


        • #5
          As a SSB what income level is looked at for the QBI phase out? Is it the total married filing joint income or just the income from the business? I assume it is total married filing joint income and then we would be well past the phase out level but is that an incorrect assumption?


          • #6
            Looking at this link I am even further confused by the QBI deduction. The 1099 income I get is for research with pharma so it would qualify since it is not providing a medical service?