Wife moving jobs, new position only offers SEP-IRA

[familydocPA]

My wife just took a position for another company which is very small, and they only offer a SEP-IRA.  Although the salary is about the same at $50k, this will seemingly have a pretty negative effect on our retirement savings / tax planning.  We had been maxing out my 403b, 457, and her 401k every year, plus each contributing to a "backdoor" Roth.  This was a nice plan as it allowed us to put about $85k per year into tax sheltered retirement accounts.

It is my understanding that with the SEP-IRA, we will no longer be able to shelter any of her income (because as an employee she is not allowed to contribute), and we can no longer do a Roth for her (because of pro rata rules), resulting in a net loss of $24k per year in tax sheltered money.  I don't think she is eligible for a traditional or Roth IRA because of my income. Am I missing any potential tax strategies here, or is this just how it will be?

[jfoxcpacfp]

You're not exactly missing anything. I suppose you could look at this from the perspective of her gross income as her base salary plus her SEP contributions, which are deducted to bring her salary down to $50k. The annual contribution depends upon the percentage the employer chooses to add each year, which is strictly at the whim of the employer (anywhere between 0% and 25% of pay).

You are correct that the SEP will preclude a backdoor Roth conversion. She can continue to contribute to a TIRA annually (nondeductible) and wait to convert until she can find some SE income which will allow her to convert without owing taxes. Of course, this means taxes paid on any growth at conversion or leaving the $$ in a money market account to avoid taxes. In the meantime, continue saving in a taxable investment account.

These articles may be helpful:

• Small Business Retirement Plans: SEP IRAs


• Explaining Backdoor Roth IRAs


• 11 Reasons You Need a Taxable Investment Account

 

[Dr. Mom]

Get comfortable with taxable investing.  It will offer you much flexibility.

[litovskyassetmanagement]

familydocPA wrote:

My wife just took a position for another company which is very small, and they only offer a SEP-IRA.  Although the salary is about the same at $50k, this will seemingly have a pretty negative effect on our retirement savings / tax planning.  We had been maxing out my 403b, 457, and her 401k every year, plus each contributing to a “backdoor” Roth.  This was a nice plan as it allowed us to put about $85k per year into tax sheltered retirement accounts.

It is my understanding that with the SEP-IRA, we will no longer be able to shelter any of her income (because as an employee she is not allowed to contribute), and we can no longer do a Roth for her (because of pro rata rules), resulting in a net loss of $24k per year in tax sheltered money.  I don’t think she is eligible for a traditional or Roth IRA because of my income. Am I missing any potential tax strategies here, or is this just how it will be?

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It makes zero sense to have a SEP IRA for a small practice with HCE staff.  I would try to convince them to have a 401k with profit sharing.  Not only will it lower the cost to the employer, but it would allow them to do a lot of other good things such as catch-up contributions for those over 50 and back-door Roth.  They probably had it for a long time and they owner might not want to change, but given how expensive a SEP can get for a small practice, I would think that at least doing the cost-benefit analysis of SEP vs. 401k would be a good idea.

[VagabondMD]

There are lots of ways to save money for retirement. Maybe your wife's job with the new company will decrease the tax efficiency of your savings strategy, but looking at the forest from the trees, it should not be devastating or even matter all that much in the grand scheme.