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Rec's re: SEP or 401k for me

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  • Rec's re: SEP or 401k for me

    Hello, wanted to ask some of the more seasoned folks their thoughts on whether I should got SEP or 401k.

    About me: 40 yr old physician PM&R inpatient, wife is currently stay at home mom, 2 babies less than 2 years old. I am generally frugal, and have been fastidious about savings and retirement accounts. My total net is north of 1 million, cars payed off, currently renting low cost house (2400/mo). Student loans for wife and I combined < 100K.

    Goal is retire by 62 if possible from full time inpatient work when my girls finish college. But I can see myself just rounding on 7-10 patients a few days a week after 62 for many years if its a good situation.

    Pretty much most of my attending career (>10 years) was employed and mid 2015 moved, started own PLLC to be an independent contractor at local rehab hospital. Last year since I worked about half the year as an employed MD I contributed about half the total (8500 or so) to employer sponsored retirement. Due to cash flow issues as a new practice I did not contribute anything at all for 2015 towards a self employed retirement account.

    Around December of 2015, the collections started rolling on, and my net earnings for 2015 in my PLLC is about $73K.

    So I called Vanguard last week and was told that I could not open a self employed 401k for 2015 but I could do a SEP. My understanding is if I do a SEP I can do  25% of my 2015 earnings which would equate to 13K or so for 2015.

    I also understand a SEP is much easier to maintain and I have good options for investment if I go with Vanguard which is my preferred brokerage (Fidelity being my second brokerage).

    So, wanted to ask the forum if I should just do a SEP so I can have continuity for my new account or do a SEP for 2015 and 401K for 2016 onwards.

    Or should I consider other options?

     

     

  • #2
    Assuming your PLLC is taxed as a Schedule C sole proprietor and assuming you want to maximize your contributions, you would be better off with a 401(k) if your Schedule C income going forward will be less than 276K a year as a 401(k) would permit you higher total contributions than a SEP.  If your income will be higher than 276K, a SEP by itself would allow you to have contributions of up to $53K a year (same a maximum 401(k) plan).  If you want contributions higher than that level, then look for 401(k) and Cash Balance Plan combination.

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    • #3
      If your choice is between a solo 401k and a SEP, 401k wins hands down except in the following 2 situations:

      1. you need to set up and/or fund your account late. A SEP can be set up and funded until 10/15 of the year following the tax year for which it is intended. Iow, you have until 10/15/16 to fund your S for 2015.

      2. when plan assets exceed $250k. At that point, compliance is more complicated and you'll have to hire a TPA (third party administrator) for reporting. I still don't think that's a deal-breaker because you can still contribute to a 401k without the percentage limitations of the SEP.

      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4




        Hello, wanted to ask some of the more seasoned folks their thoughts on whether I should got SEP or 401k.

        About me: 40 yr old physician PM&R inpatient, wife is currently stay at home mom, 2 babies less than 2 years old. I am generally frugal, and have been fastidious about savings and retirement accounts. My total net is north of 1 million, cars payed off, currently renting low cost house (2400/mo). Student loans for wife and I combined < 100K.

        Goal is retire by 62 if possible from full time inpatient work when my girls finish college. But I can see myself just rounding on 7-10 patients a few days a week after 62 for many years if its a good situation.

        Pretty much most of my attending career (>10 years) was employed and mid 2015 moved, started own PLLC to be an independent contractor at local rehab hospital. Last year since I worked about half the year as an employed MD I contributed about half the total (8500 or so) to employer sponsored retirement. Due to cash flow issues as a new practice I did not contribute anything at all for 2015 towards a self employed retirement account.

        Around December of 2015, the collections started rolling on, and my net earnings for 2015 in my PLLC is about $73K.

        So I called Vanguard last week and was told that I could not open a self employed 401k for 2015 but I could do a SEP. My understanding is if I do a SEP I can do  25% of my 2015 earnings which would equate to 13K or so for 2015.

        I also understand a SEP is much easier to maintain and I have good options for investment if I go with Vanguard which is my preferred brokerage (Fidelity being my second brokerage).

        So, wanted to ask the forum if I should just do a SEP so I can have continuity for my new account or do a SEP for 2015 and 401K for 2016 onwards.

        Or should I consider other options?

         

         
        Click to expand...


        The answer is actually to do both.  Do a SEP for 2015, then do a solo 401k for 2016 and beyond.  Roll your SEP into your solo 401k, so that you can also do backdoor Roth.  I know that Vanguard does not allow incoming rollovers, so you'll either have to open a solo 401k elsewhere, or get a custom plan document and do something like this:

        https://www.whitecoatinvestor.com/improving-the-vanguard-individual-401k-with-a-customized-plan

        You can potentially add your wife to the payroll and contribute on her behalf as well, and contribute a lot more than a SEP would allow (so you can contribute $18k x 2 plus 20% of the rest, which is a lot better than just 20% with SEP).  Even if you are participating in another retirement plan (such as another 401k), I would still do the salary deferral into your solo 401k, because the investment choices are most likely much better, so you can put just enough into your W2 retirement plan to get a match, and the rest can go into your solo 401k.

         
        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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