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Opening a SEP-IRA

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  • Opening a SEP-IRA

    I just negotiated a big boost for my consulting side-hustle, taking it from glorified pizza money to ~$70k/year. I'm planning on opening a SEP-IRA, which should allow me to put away an additional $15k or so tax-deferred.

    I understand this would be subject to the pro-rata rule for my back-door Roth converstion. Does it still make sense to do a back-door and pay the taxes, or just drop the backdoor Roth for myself? I understand we can still do one for my wife without the pro-rata.

    Do I have that right?

  • #2
    You're correct on the fact that a SEP-IRA would complicate your Backdoor Roth IRA.

    A better option might be to open a Solo 401(k). It would not cause you the complications with your Backdoor Roth IRA.

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    • #3
      If I max my 401k at my main job, I cannot contribute to a solo 401k, right?

       

      EDIT: I understand this is a little more complicated. I actually get a 403(b) from my work, not a 401(k).

      Comment


      • #4
        If you already put $18,000 of salary deferral into your employer's 401(k), then you will not be able to make elective deferrals into your Solo 401(k). However, you can still make profit sharing contributions, also known as Employer Contribution. This amount cannot exceed $54,000.

        If your business type is a Corporation, the maximum profit sharing contribution is 25% of gross income.

        If your business type is a Sole Proprietor/Partnership, the maximum profit sharing contribution is 20% of net income.

        Hope this helps.

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        • #5




          I just negotiated a big boost for my consulting side-hustle, taking it from glorified pizza money to ~$70k/year. I’m planning on opening a SEP-IRA, which should allow me to put away an additional $15k or so tax-deferred.

          I understand this would be subject to the pro-rata rule for my back-door Roth converstion. Does it still make sense to do a back-door and pay the taxes, or just drop the backdoor Roth for myself? I understand we can still do one for my wife without the pro-rata.

          Do I have that right?
          Click to expand...


          Nice hussle.

          Comment


          • #6
            Normally, you have a separate annual addition limit (2017 = $54K) for employer retirement plan of businesses you own. However, the participant of a 403b is considered to control the plan. Therefore, 403b employee deferrals and employer contributions must be subtracted from the $54K limit to arrive at the maximum annual additions for your owned business employer retirement plans.

            This is true whether that retirement plan is a SEP IRA or a one-participant 401k. With the 2017 $18K employee deferral limit reached at the 403b, there is no difference in the maximum employer contribution between a SEP IRA or one-participant 401k. If you want to do Backdoor Roths, the one-participant 401k plan is the clear choice.

            If your main job is as a W-2 employee and your Social Security (SS) wages >= the SS maximum wage base (2017 = $127,200), you should stick to being self-employed. Your maximum employer contribution will be 20% of net self-employment earnings (net business profit - 1/2 SE tax).

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            • #7
              Thanks that makes a lot of sense.

               

               

              Adventure: was able to re-negotiate rates and institute a retainer with my recent appointment to faculty. #1 pro-tip; upgrade from the kiddie table as fast as possible. Too many MD/PhD's are content with training forever.

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              • #8
                Do the individual 401(k). Your annual limit is the lesser of:
                - 20% of net profit after the self-employment tax deduction (income, minus expenses, minus half SE tax).
                , or
                - $54,000 minus your total 403(b) contribution

                So if you made $70k, and you put $18,000 into your 403(b) as employee contribution/elective deferral, and your employer "matched" $22,000 or less (total $40,000 or less), then your individual 401(k) max is *about* $14,000 in "employer" contribution. If your employer contributed less, your max is limited by your self-employment income; if your employer put in more, it's limited by the $54,000 max.

                The 403(b) is considered to be "yours" instead of "your employer's," unlike 401(k)...which means instead of $54k from yours and $54k from theirs, both your 403(b) and individual 401(k) fall subject to the one $54k limit for "yours."

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                • #9
                  so can we have a w2 with a maxed out IRA (18 + 36) and a separate 1099 with a SEP-IRA maxed out at 25% and a backdoor roth?

                  if so where does the roth come from?

                   

                  and is a sep-ira smarter or 401k solo?

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                  • #10




                    so can we have a w2 with a maxed out IRA (18 + 36) and a separate 1099 with a SEP-IRA maxed out at 25% and a backdoor roth?

                    if so where does the roth come from?

                     

                    and is a sep-ira smarter or 401k solo?
                    Click to expand...



                    • You can have a W2 with a maxed-out employer contribution to a 401k or 403b (not IRA) and the employer can make profit-sharing contributions of up to $54k (2017 allowances).

                    • The Roth comes out of your personal funds.

                    • A solo-401k is generally preferable unless you are contributing for a prior year. The solo-k must be set up by 12/31 of the year to which it applies. You have until 10/15 of the following year to set up and fund a SEP-IRA.

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

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                    • #11
                      hmm ok, so i already did the max out for 1.

                      2. already contributed from personal bank acct.

                      3. sep setup already and contributed 25% of 1099s...i'm assuming solo is preferred due to possibility for catch up and loan possibilities. though for someone young, it wouldn't make much a difference right?

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                      • #12




                        hmm ok, so i already did the max out for 1.

                        2. already contributed from personal bank acct.

                        3. sep setup already and contributed 25% of 1099s…i’m assuming solo is preferred due to possibility for catch up and loan possibilities. though for someone young, it wouldn’t make much a difference right?
                        Click to expand...


                        You may have over-funded your SEP. Unless you are receiving wages from your S-corp, the maximum contribution is more like 20% of net (not gross) income after deducting 1/2 of related FICA taxes. Presume you will be writing some expenses off against your IC pay - yes?

                        Having a SEP will mean that any backdoor Roth conversions will be at least partially taxable per the pro-rata rule.

                        The Pro-Rata Rule: A Backdoor Roth Landmine
                        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                        • #13
                          yea, its just a sole proprietorship. no s-corp. its just a gig on the side that pays 1099. luckily, they just assigned me a couple more shifts to bring that up to close enough. i might end up with a bit of a over-fund, but i can withdraw some out to make it even i suppose. it has just been a very uneven 1099 ... fast and famine with the shifts ....

                           

                           

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                          • #14


                            i might end up with a bit of a over-fund, but i can withdraw some out to make it even i suppose. it has just been a very uneven 1099 … fast and famine with the shifts ….
                            Click to expand...


                            yes, you can - just do so by 4/15. If you end up with more income than you expect, I'd recommend waiting until after 12/31 to contribute any more.
                            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                            • #15
                              awesome, you've been so very helpful!

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