SIMPLE IRA

[triad]

I found an article (https://www.fool.com/retirement/2017/06/30/ask-a-fool-im-self-employed-how-should-i-save-for.aspx) that states: "a self-employed individual can contribute up to $25,000 or 100% of compensation, whichever is lower"

I was under the understanding that the max contribution was 12.5k plus 3% of salary.  Is that not accurate?  That would make the SIMPLE a bit more appealing then a 401k or SEP next year...

[jfoxcpacfp]

Wow, that's just plain false. Hard to imagine finding incorrect information on the internet but it sounds as if you are better informed than TMF Math Guy   . He also mentions the catch-up contribution is $6k for age 50+, but it is actually $3k.

Looks like his side hustle is stock picking. I would hate to have him for an advisor.

 

[triad]

yeah, it sounded too good to be true!  I guess I have a tough decision to make next year...

[litovskyassetmanagement]

triad wrote:

I found an article (https://www.fool.com/retirement/2017/06/30/ask-a-fool-im-self-employed-how-should-i-save-for.aspx) that states: “a self-employed individual can contribute up to $25,000 or 100% of compensation, whichever is lower”

I was under the understanding that the max contribution was 12.5k plus 3% of salary.  Is that not accurate?  That would make the SIMPLE a bit more appealing then a 401k or SEP next year…

Click to expand...

Actually, this is correct. Please take a look here:

http://www.dentaltown.com/Dentaltown/Article.aspx?i=403&aid=5625

Max is $25k.  However, the W2 you need to get to the max, that's another story altogether.  It would have to be well over $400k to get there, and definitely not worth it.  So technically you can contribute $25k, practically, that's not feasible unless your W2 is $417k (or something of this magnitude).  So if your W2 was on the low side, your contribution will also be closer to $12.5k (so with a 3% and a W2 of $200k, you'd be at $18.5k, which is not bad).

A SIMPLE vs. 401k is not a one year thing.  It really is a long term decision.

[triad]

the "$25,000 or 100% of compensation, whichever is lower” is the part that isn't correct.  That implies that I could defer 25k if I had a salary of 50k.

I'll have a 401k eventually so that I can do a backdoor roth but I'm strongly considering going down to part time soon so my income will drop substantially.  Depending on how low my income drops I may not be able to fully fund a 401k which probably wouldn't make it worthwhile.

I may end up doing non-deductible IRA's for several years then setup an i401k to roll my SEP-IRA into before doing the roth conversion.  That plan will work to avoid a large tax bill, right?

[spiritrider]

The article uses some imprecise language, but is generally correct regarding a SIMPLE IRA. Yes, a self-employed person can make a maximum employee deferral of $12,500 ($15,500 >= age 50) and a 100% employer match on the first 3% of compensation. However, that employer match is further limited.

The employee/employer contributions are limited to $25,000 ($31,000 >= age 50) or 100% of compensation, whichever is lower. The reason is that the employer contribution can not exceed the employee deferral. This includes the catch-up contribution which is the source of the $6,000 increase in the maximum. With a $3,000 catch-up contribution and a potential additional $3,000 employer match.

This is no different than saying the maximum contributions to a one-participant 401k are $54K or 100% of compensation.

 

[jfoxcpacfp]

spiritrider wrote:

The article uses some imprecise language, but is generally correct regarding a SIMPLE IRA. Yes, a self-employed person can make a maximum employee deferral of $12,500 ($15,500 >= age 50) and a 100% employer match on the first 3% of compensation. However, that employer match is further limited.

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True, but $25k or 100% of comp, whichever is lower, is not just imprecise, it's false. That would mean an employee or SE business owner making $25k could contribute $25k, and so forth. The fact that your explanation corrects his statement does not make the original statement right

triad wrote:

I may end up doing non-deductible IRA’s for several years then setup an i401k to roll my SEP-IRA into before doing the roth conversion.  That plan will work to avoid a large tax bill, right?

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Hard to comment w/o knowing more about your situation. Why are you using the SEP over the solo-k now?

The problem with building up nondeductible IRAs is that you should go ahead and invest and the income will be taxable at your top marginal rate when you convert to a Roth. Not sure how this plan would "work to avoid a large tax bill".
.

[litovskyassetmanagement]

triad wrote:

the “$25,000 or 100% of compensation, whichever is lower” is the part that isn’t correct.  That implies that I could defer 25k if I had a salary of 50k.

I’ll have a 401k eventually so that I can do a backdoor roth but I’m strongly considering going down to part time soon so my income will drop substantially.  Depending on how low my income drops I may not be able to fully fund a 401k which probably wouldn’t make it worthwhile.

I may end up doing non-deductible IRA’s for several years then setup an i401k to roll my SEP-IRA into before doing the roth conversion.  That plan will work to avoid a large tax bill, right?

Click to expand...

Yes, I agree in the case of a SIMPLE this is not the right way to put it.  Just break it down into a salary deferral and a match/non-elective contribution, and the match is NOT subject to $270k maximum (which is pretty conspicuous because IRS only mentions the $270k max in relation to non-elective contribution).

You can't even consider opening an individual 401k if you have a practice with staff, even just to roll your SEP into it.  That is definitely not going to fly with the IRS.

[spiritrider]

I am going to disagree again and make my point again.

The two following two statements are both 100% correct. "The maximum SIMPLE IRA contribution is $25,000 or 100% of compensation, whichever is lower." The maximum SEP IRA/401k contribution is $54,000 or 100% of compensation, whichever is lower."

We hear the latter all the time and most people know what that means. The fact that the former is a little known limit does not change its validity. In both cases this is an expression of different statutory maximum employee/employer limits.

Yes, in both cases there are additional more strict limits ($12.5K/$18K employee deferral limits and 3%/25% employer contribution limits), but that does not affect the absolute validity of the respective employee + employer contribution limits.

[triad]

jfoxcpacfp wrote:

 

triad wrote:

I may end up doing non-deductible IRA’s for several years then setup an i401k to roll my SEP-IRA into before doing the roth conversion.  That plan will work to avoid a large tax bill, right? 

Click to expand…

Hard to comment w/o knowing more about your situation. Why are you using the SEP over the solo-k now?

The problem with building up nondeductible IRAs is that you should go ahead and invest and the income will be taxable at your top marginal rate when you convert to a Roth. Not sure how this plan would “work to avoid a large tax bill”.
.

Click to expand...

I have employees so a solo can't work for me until I start a 2nd business (WCI talked about starting a lawn care business for the sole purpose of doing the 401k rollover).

So if I invest the money in the non-deductible IRA when I convert the gains would be taxable?  I'm assuming that the initial 5500 contribution wouldn't be taxable again since that was never deducted in the first place.

[litovskyassetmanagement]

spiritrider wrote:

I am going to disagree again and make my point again.

The two following two statements are both 100% correct. “The maximum SIMPLE IRA contribution is $25,000 or 100% of compensation, whichever is lower.” The maximum SEP IRA/401k contribution is $54,000 or 100% of compensation, whichever is lower.”

We hear the latter all the time and most people know what that means. The fact that the former is a little known limit does not change its validity. In both cases this is an expression of different statutory maximum employee/employer limits.

Yes, in both cases there are additional more strict limits ($12.5K/$18K employee deferral limits and 3%/25% employer contribution limits), but that does not affect the absolute validity of the respective employee + employer contribution limits.

Click to expand...

You are 100% correct.  I was thinking more in terms of the confusion that this creates, as you've noticed ;-)  That's why I always break contribution into pieces just to make sure it is clear.

[jfoxcpacfp]

Kon Litovsky wrote:

spiritrider wrote:

I am going to disagree again and make my point again.

The two following two statements are both 100% correct. “The maximum SIMPLE IRA contribution is $25,000 or 100% of compensation, whichever is lower.” The maximum SEP IRA/401k contribution is $54,000 or 100% of compensation, whichever is lower.”

We hear the latter all the time and most people know what that means. The fact that the former is a little known limit does not change its validity. In both cases this is an expression of different statutory maximum employee/employer limits.

Yes, in both cases there are additional more strict limits ($12.5K/$18K employee deferral limits and 3%/25% employer contribution limits), but that does not affect the absolute validity of the respective employee + employer contribution limits.

Click to expand…

You are 100% correct.  I was thinking more in terms of the confusion that this creates, as you’ve noticed   That’s why I always break contribution into pieces just to make sure it is clear.

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I agree that, technically, you are correct. To the intended audience of this information, however, it is incorrect if followed as stated. I realize that sounds as if I'm wiggling, which is not my intent, but this advice, taken alone and if followed as written, is wrong. The OP was considering changing plans based upon reading that statement.

I realize that technicians like you two who can quote the regs can wind around to the "whole truth", maybe even the author of the article (which I doubt), but 99%+ of the audience would not go there. There are plenty of areas of the regs that I could lift a statement from and the statement, on its own, would be wrong unless qualified with the context. Maybe we can say "incomplete" and call it a draw  

[jfoxcpacfp]

triad wrote:

I have employees so a solo can’t work for me until I start a 2nd business (WCI talked about starting a lawn care business for the sole purpose of doing the 401k rollover).

So if I invest the money in the non-deductible IRA when I convert the gains would be taxable?  I’m assuming that the initial 5500 contribution wouldn’t be taxable again since that was never deducted in the first place.

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Yes, the solo is a no-go. And yes, the gains would be taxable but losses (we always seem to forget that side!) would be nondeductible. And yes, the $5,500 contribution would give you basis in that amount.

[litovskyassetmanagement]

triad wrote:

jfoxcpacfp wrote:

 

triad wrote:

I may end up doing non-deductible IRA’s for several years then setup an i401k to roll my SEP-IRA into before doing the roth conversion.  That plan will work to avoid a large tax bill, right? 

Click to expand…

Hard to comment w/o knowing more about your situation. Why are you using the SEP over the solo-k now?

The problem with building up nondeductible IRAs is that you should go ahead and invest and the income will be taxable at your top marginal rate when you convert to a Roth. Not sure how this plan would “work to avoid a large tax bill”.
.

Click to expand…

I have employees so a solo can’t work for me until I start a 2nd business (WCI talked about starting a lawn care business for the sole purpose of doing the 401k rollover).

So if I invest the money in the non-deductible IRA when I convert the gains would be taxable?  I’m assuming that the initial 5500 contribution wouldn’t be taxable again since that was never deducted in the first place.

Click to expand...

If you have a 2nd business that you own 100% (and you own 100% of your practice), you still can't have a separate plan for that income because you'll run into a controlled group situation since you own both businesses.  If you owned 50% of the practice or less, then you could have a separate 401k plan for the other business without covering the staff in the practice.  If you don't have a SEP or other deductible IRAs, non-deductible conversion won't be taxable.