Just starting and Accountant says I can only contribute to SEP not solo401K

[hellerdn]

Hi all, I just discovered WCI and so far have gotten a ton of useful info. Since reading the book and website, I've wanted to redo some of my accounts to maximize retirement accounts and minimize my tax bill to Uncle Sam.

I graduated from fellowship about 3 years ago, and have been trying to save at least 100k yearly. During fellowship, I opened Roths for myself and my wife and have around 30 in mine and 5 in my wives (unfortunately only started hers later, big mistake retrospectively). Now have around 250k saved, most of it in a taxable account in various mutual funds since I wasn't on top of things last year, and didn't contribute the max to my prior 403b.

I have since switched jobs and am going through my finances to help with retirement planning. Aim is for FI by 52-55. Now make the bulk of my salary on a W2. I rolled over my old 403b to my current 401K, much lower fees. I now contribute the max, 18K  to my employer 401K plan and get a partial match of around 10K (and unfortunately does not allow further contributions to the 53K max). I also have a side gig moonlighting and make around 120K/yr paid on a 1099. We only owe 100k on our house, 3.75% rate which I hope to be paid off in the next 2 years.

I spoke with my accountant today asking about backdoor Roths, and other possible accounts solo 401K, SEP etc. He said that I can only make contributions from the 1099 income, and recommends a SEP for both myself and wife which can allow us to put another 24 into retirement accounts. But that I can't contribute to a solo 401K from my W2 income due to my employer sponsored 401K. Does that make any sense? I was hoping to do both, open a SEP with my schedule C income and then do a backdoor Roth back into our Roth accounts.

I'm also going to open 2 529s for my kids, which is long overdue.

Appreciate any advice! Thanks so much!

[jfoxcpacfp]

Your plan max contributions are $54k bg in 2017.

Your accountant is W-R-O-N-G. You can contribute approximately 20% of your net profits, same as with a SEP.

hellerdn wrote:

I was hoping to do both, open a SEP with my schedule C income and then do a backdoor Roth back into our Roth accounts.

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You cannot contribute to both a SEP and a SOLO-k in the same year, though.

Are you getting this advice from a CPA?

[hellerdn]

Yes, from my accountant, the 20% comes out to 24k a a year which he recommends splitting into 19k in my account and 5 for my wife and putting it into a SEP which also lowers my taxes a little.
Is that 54 max from both my W-2 and 1099 income or total contributions regardless.
So if I form a SEP, I can't do the backdoor Roth?
Any thing else I can or should do?
Thanks!

[jfoxcpacfp]

hellerdn wrote:

Yes, from my accountant, the 20% comes out to 24k a a year which he recommends splitting into 19k in my account and 5 for my wife and putting it into a SEP which also lowers my taxes a little.
Is that 54 max from both my W-2 and 1099 income or total contributions regardless.
So if I form a SEP, I can’t do the backdoor Roth?

Click to expand...

If you have pre-tax $ in an IRA at 12/31, you will owe pro-rata taxes on the backdoor Roth conversion. You can still do it, you will just owe taxes.

Does your wife work for you or do you have a QJV (Qualified Joint Venture)? Not sure what he means about splitting the SEP otherwise.

[childay]

Perhaps I am reading it incorrectly but your accountant seems correct.  You cannot have a solo 401k from the W2 income since you have an employer plan already.  However you could set up a SEP or solo401k for the 1099 income.

[jfoxcpacfp]

childay wrote:

Perhaps I am reading it incorrectly but your accountant seems correct.  You cannot have a solo 401k from the W2 income since you have an employer plan already.  However you could set up a SEP or solo401k for the 1099 income.

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I just re-read that and he does say contribute to a SOLO-k from W2 income. @childay is correct - the SOLO-k has to be based on the 1099 income. Is that what you meant originally? But do recommend the SOLO-k, not SEP, and you need clarification on the splitting.

[hellerdn]

Thanks for the responses.
My wife does work for me doing some office work. By splitting, I mean to put some of the 24k allowed of the 1099 income in my account and some in hers.
Why do you recommend a SOLO over a SEP?
Thanks for a your help

[The White Coat Investor]

Crummy CPA advice strikes again. I can't believe how many CPAs have been taught about Backdoor Roth IRAs, the advantages of an individual 401(k) over a SEP-IRA, and the multiple 401(k) rules by readers of this site.

[DMFA]

Your backdoor Roth can come from anywhere.  You would need to eliminate all pre-tax IRAs to prevent double-taxation of the non-deductible contribution upon conversion to Roth, though.

An independent 401(k) has to come from your contractor 1099 income.  If you max your employEE contributions from your employed 401(k) at $18,000, then you can only make employER contributions to the indie 401(k).  The max for employer contributions is 20% of net profits, defined as income, minus expenses, minus half of self-employment tax.  This ends up coming out to around 18.5% of income and is actually the same as the 25% wage limit for SEP; x/(1+x) = 25%/(1+.25%) = .25/1.25 = 1/5 = 20%.

Your spouse can't have a 401(k) with your "business" unless she actually has earned income from it.  You can't have "her" 401(k) with "your" money.  If you "pay" her some form of income, then she can use that to do a 401(k) with.

If you have already contributed to a SEP for 2017, you can withdraw the contributions and contribute to an independent 401(k) instead.  This is superior to the SEP in this regard since it has nothing to do with pre-tax IRAs and does not cause pro rata taxation on non-deducted IRA contributions when converted to Roth.

[jfoxcpacfp]

The White Coat Investor wrote:

Crummy CPA advice strikes again. I can’t believe how many CPAs have been taught about Backdoor Roth IRAs, the advantages of an individual 401(k) over a SEP-IRA, and the multiple 401(k) rules by readers of this site.

Click to expand...

Insert NOT  

[jfoxcpacfp]

hellerdn wrote:

My wife does work for me doing some office work. By splitting, I mean to put some of the 24k allowed of the 1099 income in my account and some in hers. Why do you recommend a SOLO over a SEP?

Click to expand...

• You can't arbitrarily "split" SEP-IRA contributions to your wife except as a % of her compensation using the same % that applies to you.


• A SEP will prohibit you from contributing to a backdoor Roth because it is a form of IRA. A SOLO-k preserves that opportunity and you can also put your wife on the payroll and contribute for her, too.