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    Hey guys -

    Not totally new here but very early in career. Doing the standard thing around here which consists of refinancing loans to a 5-year term and saving 20% of pre-tax income for retirement.

    Question about maxing out my retirement contributions.

    My wife and I have the following available:

    Me - 401(k)

    Me - SEP IRA or Individual 401k. Currently I have opened up a SEP IRA earlier this year and have about 9k in it right now.

    Her - 403b from main job

    Her - 457 from main job

    Her - 401k (or maybe 403b?) from 2/8 work at the VA

    Two questions -

    1. From my understanding, she can't max out her 403b as well as her VA retirement account because it would surpass the 18k max per individual worker. Is that correct?

    2. Can I roll my SEP IRA into a Individual 401k. From my understanding, this would allow me to start backdoor Roth contributions. Is that right? Is that allowed since its still November?



  • #2

    1. That is correct. She can contribute a maximum of $18k across 401k and 403b accounts. Her 457 is counted separately.

    2. There are a few issues going on here:

      • Did you set up your SEP for year 2016 (deadline was 10/17/17) or for year 2017? If for 2016, you can contribute up to $54k into your solo-k for 2017 and r/o the SEP into the solo-k.

      • If the SEP was for 2017, you have until 12/31 to r/o your SEP into your solo-k to do a backdoor Roth conversion for 2017.

      • However, you can contribute to the nondeductible TIRA for 2017 (step 1 of the backdoor process) and wait until 2018 to convert to the Roth (step 2) if you want. What is most important is that you do not have any $$ in your SEP on 12/31 of the calendar year of conversion.

    This post may help: Explaining Backdoor Roth IRAs

    My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
    Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


    • #3

      1. There is one employee deferral limit (2017 = $18K, 2018 = $18.5K) across all qualified retirement plans. If she has maxed that limit thru primary W-2 403b, she can not make any further employee deferrals at the secondary W-2 whether 401k or 403b. A 457b is a non-qualified plan and has its own separate contribution limit equal to the employee deferral limit amount. So for 2017 she can defer $18K to the primary W-2 401k and 457b, but nothing to the second job unless they offer after-tax contributions in the 403b.

      2. You have not have a 5305-SEP in the same year as a 401k. Rolling over such a SEP IRA to a 401k does not cure the defect. A 401k is only allowed in conjunction with a prototype or custom designed SEP IRA plan. The only two vendors I know offering a prototype SEP IRA plan are Schwab and Merrill Lynch. Since it is already almost December, your best bet is wait until next year.

      Then you can adopt a one-participant 401k plan next year and rollover all pre-tax (traditional, SEP, or SIMPLE) IRA assets to the 401k. Remember it might be the year the non-deductible traditional IRA contribution is for, but it is the year you actually do the Roth conversion that you need to have little to no pre-tax IRA assets on 12/31. The 2017 Roth contribution can occur anytime from 1/1/17 - 4/17/18. You just adopt the one-participant 401k, rollover pre-tax IRA assets to the 401k and then do the Roth Conversion all in 2018.

      I just saw Johanna posted the exact same, much more concisely. What defects?


      • #4
        Note that @spiritrider cleaned up the defects in my response!
        My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
        Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


        • #5
          Thank you for the advice -

          After reviewing it, it looks like I have the following amounts for my SEP-IRA:

          2016 - $1,654.42

          2017 - $6,682

          So should I set up a solo 401k for this year and roll over all of it prior to 12/31?

          Then I can start a traditional IRA in 2018 and do a Roth conversion (like the link describes) in 2018?

          I might leave a little bit of space for 2017 on the table but that's okay. Just want to make sure I'm ready to fully maximize it for 2018 and not pay any penalty.



          PS - I love this blog and the wonderful advice given. Thank you.


          • #6
            Are you sure you've already contributed such a specific amount to your SEP for 2017? Usually, this is done after the eoy when you have calculated your business's net profits. Assuming you have, here are the steps to follow:

            1. Fill out the remaining space in your SEP for 2017 after you've calculated your 2017 net profit. You have until 10/15/18 to do so.

            2. Contribute $5,500 to a nondeductible TIRA for 2017 (you have until 4/17/18).

            3. Set up a solo-k for 2018 and roll your SEP into it (close the SEP). Do this before 12/31/18.

            4. Convert your TIRA to a Roth (backdoor maneuver, step 2) in 2018. Might as well go ahead and make the 2018 contribution before doing this so you can convert both years at once.

            Waiting until 2018 to open the solo-k will not limit your ability to do a backdoor Roth maneuver for 2017. Just make sure you have no balance in the SEP on 12/31 of the year that you convert to a Roth. Good luck.
            My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
            Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


            • #7
              That's perfect - thank you.

              I have contributed to 2017 because I've basically been taking 18% of each 1099 dollar and put it into the SEP-IRA as I went along.

              And thanks again, this makes perfect sense.



              • #8
                I just want to make sure you understand the maximum employer contribution and a caution for employer contributions to a future one-participant 401k.

                The maximum self-employed employer contribution for both a SEP IRA and a one-participant 401k is 20% of net self-employment earnings. Net self-employment earnings = business profit - 1/2 SE tax. Business profit = business income - business expenses.

                The reason I mention this is that 18% of 1099 income is dangerously close to the maximum employer contribution without any expenses. While it might be relatively easy to remove excess SEP IRA employer contributions, you can NOT generally remove 401k excess employer contributions. It becomes a little messy; you can not deduct the excess, it must remain in the account,  it will require the 401k plan to make a minimum of two excise tax filings and it will be subject to a 10% excise tax yearly until reconciled with future employer contribution space.

                I recommend that people be conservative during the tax year with their with 401k employer contributions. Depending on how they are making the contributions, 75% - 80% is a safer number. Then you can do a quick snapshot in early January of the following year. As long as you will be having net self-employment earnings for that year, any minor excess then can be simply reallocated to that year.

                When I first started with a self-employed retirement plans my CPA was more conservative. He would do a snapshot of net self-employment earnings for the estimated taxes and have me make the appropriate contribution at the same time as I sent the estimated tax payment. This only caused the first three quarter's employer contributions to be made during the tax year. Then he would just wait until the taxes were filed and have me contribute the exact remaining amount.


                • #9
                  one minor point,  SEP-IRA requires no independent tax filing with DOL,  401k requires 5500 EZ every summer,

                  which is a PITA, as they want $1500 if you forget or send it in a day late, and the form (uptil ~2009) was not

                  downloadable.  You had to request a special paper form from DOL.   IRS lets you do it on the 1040 for SEP-IRA.

                  Your accountant/attorney may handle this for you.  Filling out the 5500 any one with a 6th gr education could

                  do, no big deal, it is just that they hang that $1500 fine over your head if you forget.


                  IIRC the contribution limits and rules for 401k and SEP-IRA are the same.


                  • #10
                    WCICON24 EarlyBird
                    sch: Your information is not entirely correct and/or is outdated.

                    You report either your SEP IRA or one-participant 401k deductions on the exact same Line 28 of your Form 1040 return.

                    Someone with a one-participant 401k is not required to file Form 5500-EZ unless their year-end balance >= $250K. You have until the last day of the seventh month to file the return (7/31). Don't be late.

                    The IRS penalty is $25/day to a maximum of $15K. The DOL penalty does not apply to a one-participant 401k. There is Penalty Relief Program for Form 5500-EZ Late Filers. This is a maximum of $500/year with a multi-year maximum of $1,500. Don't be late.

                    P.S. Very important for people in the income ranges of Physicians, a SEP IRA will interfere with Backdoor Roths.