retirement for an independent contractor

[DMFA]

mdfamily wrote:

“You can make a $54K 2017 SeP IRA contribution in April 2018 for tax year 2017, adopt a one-participant 401k for 2018, rollover the SeP IRA balance prior to 12/31 and then do Backdoor Roth.”

The 12/31 you mentioned is 12/31/2018 correct? Yes that sounds like something I would do.

If I do a backdoor Roth for 2017 (i thought it’s a one time thing that I did last time, and now it’s just a Roth, I didn’t know it’s a “backdoor” process every year) will have to pay additional taxes for it?
I understand that if I do the backdoor Roth end of 2018 after I have already converted to a 401k would not require additional taxation.

Click to expand...

Here are your steps:

1. Contribute $5,500 to traditional IRA for 2017. Don't deduct it. (Backdoor Roth part 1)


2. Convert traditional to Roth IRA before 12/31/2017. You can use the same account as prior years. This should not be taxed because the converted money has all been taxed as income before. (Backdoor Roth part 2)


3. Open a SEP-IRA with zero balance and contribute to it *after* 1/1/2018 (so it does not cause taxation of your Roth conversion) *for* the tax year 2017. You can do this anytime before tax filing (4/17/2018).


4. Open an individual 401(k) with effective date 1/1/2018. This will be your retirement vehicle going forward. 401(k) can't have elective deferrals (aka employee contributions) for money earned prior to the effective date, and I'm not totally sure you've got enough business days for the drones at the brokerage to get everything set in time. Ensure this account accepts incoming rollovers.


5. Do backdoor Roth again for 2018. You can use the same accounts you did before.


6. Roll your SEP into the 401(k) prior to 12/31/2018 to prevent pro rata taxation of your Roth conversion.

Sorry it's complicated, but it's just simplicity in series.

[spiritrider]

If you want the $5500 in the Roth IRA every year, you have to do a backdoor Roth every year. As long as you do not have any other pre-tax IRA assets. You will only pay taxes on any earnings that may or may not occur on the non-deductible contribution before you do the Roth conversion.

[mdfamily]

"You can make a $54K 2017 SeP IRA contribution in April 2018 for tax year 2017, adopt a one-participant 401k for 2018, rollover the SeP IRA balance prior to 12/31 and then do Backdoor Roth."

The 12/31 you mentioned is 12/31/2018 correct? Yes that sounds like something I would do.

If I do a backdoor Roth for 2017 (i thought it's a one time thing that I did last time, and now it's just a Roth, I didn't know it's a "backdoor" process every year) will have to pay additional taxes for it?
I understand that if I do the backdoor Roth end of 2018 after I have already converted to a 401k would not require additional taxation.

[spiritrider]

Note: DMFA's important point. The pro rata taxation is based on your 12/31 balance in all pre-tax IRAs.

You can make a $54K 2017 SEP IRA contribution in April 2018 for tax year 2017, adopt a one-participant 401k effective 1/1/2018, rollover the SEP IRA balance prior to 12/31 and do Backdoor Roth.

Note: The order of the Backdoor Roth and the rollover is not important. The only thing that matters for pro rata taxation of a Backdoor Roth in 2018 is the pre-tax IRA balance on 12/31/2018.

[mdfamily]

Oh gosh,
My plan for 2017 was to put 54k pre tax in a sep ira (before April 2018) and also the 5500 (which I understand would not be pretax, and I would make that payment before the end of the year).
Will I not be able to do that without additional taxation?

[spiritrider]

mdfamily wrote:

Wait, if I have a back door IRA I can’t do a sep ira?
Last year I put 5500 there and I was thinking of putting another 5500

Click to expand...

A Backdoor Roth consists of two steps. 1. A non-deductible contribution to a traditional IRA. 2. A Roth conversion of the traditional IRA to a Roth IRA.

However, a Roth conversion is always a pro rata conversion of all non-deductible basis and all pre-tax (traditional, SEP and SIMPLE) IRA.

It is only advantageous to do a Backdoor Roth if you have no pre-tax IRA balances. Then the Roth conversion of the non-deductible traditional IRA contribution will have little (maybe minuscule earnings on the contribution) to no tax liability.

If you make SEP IRA contributions, any Roth conversion will be pro rata with the SEP IRA balance as identified by DMFA.

[DMFA]

mdfamily wrote:

Wait, if I have a back door IRA I can’t do a sep ira?
Last year I put 5500 there and I was thinking of putting another 5500

Click to expand...

There is no "can't." But if you have SEP-IRA money at the end of the year, then your non-deducted Traditional IRA contribution becomes taxed on conversion because of the pro rata rule: Roth conversions are considered to come equally from *all* pretax IRA money, not just the non-deducted portion.

So if you made the non-deducted $5,500 contribution, converted $5,500 to Roth, and had $22,000 in a SEP-IRA on 12/31 of that year, then that conversion would have been considered to have come 20% from the non-deducted and 80% from the SEP, meaning you'd owe taxes on $4,400 of the conversion - that you'd *already paid* when you earned it, hence it's double-taxed.

This is why most of us opt for the individual 401(k).

[spiritrider]

MPMD wrote:

spiritrider wrote:

I’m not trying to discourage anyone from adopting a one-participant 401k. For most physicians without eligible employees, it still represents the best opportunity for significant tax-advantaged retirement benefits, except for maybe a cash balance plan in middle age. Just don’t treat it like another IRA account and think it is that simple.

Click to expand…

Can I ask you to expand on that a bit?

I know that it sounds like I’ve screwed up some math, but that is just an arithmetic error it doesn’t seem related to particularly arcane rules.

Starting this account was really simple and funding it is as well.

Aside from my math error I never felt like I had a really complex product until you typed that line.

I mean I had a pretty significant amount of IC income this year ~$50k and I can’t do a SEP-IRA b/c I do Roth, are you arguing that I should just not try to do solo-401k?

Click to expand...

No, I am not saying physicians shouldn't use one-participant 401k plans, because in most cases they are their best option. I think you should most definitely use such a plan for your circumstances

I was just trying to point out that one-participant 401k plans are still 401k plans and people shouldn't treat them so lightly. They really should have some professional advice and not just rely on some random anonymous person on the internet. That person does not know the totality of your circumstances and anyone can make an error.

Even with professional assistance it is better to educate yourself of the necessary information and I'm not so sure that this forum or any forum is sufficient to do that. Learning the bare minimum is not usually sufficient. Even with a professional it is a good idea to know the underlying information.

For example, I always suggest new businesses and/or new users of employer retirement plans at least use a professional for the first one or two years. Also, I always suggest that someone doing a Backdoor Roth and using tax software know what the 8606 should look like to verify its correct completion.

[spiritrider]

Ok, lets just slow down a bit and sort this out.

[mdfamily]

Wait, if I have a back door IRA I can't do a sep ira?
Last year I put 5500 there and I was thinking of putting another 5500

[MPMD]

spiritrider wrote:

mdfamily wrote:

It looks like they all want snail mail for solo 401k, I wonder why.

Click to expand…

Yes, this is correct. This not a trustee/custodian requirement, this is an IRS requirement.

The SEP IRA adoption agreement only controls how the plan’s contributions are determined. The individual’s SEP IRA account is still fundamentally an Individual Retirement Arrangement (IRA) account. The only thing a custodian does is apply different contribution limits. Other than that, once the funds are in the account, all other IRA rules apply. Therefore, the account opening rules are mostly IRA rules.

Likewise one-participant 401k, is first and fundamentally a 401k account. People tend to think of this as not much different than a SEP IRA except you can make employee deferrals. Nothing could be further from the truth. Your one-participant 401k plan is 99.99% subject to 401k laws, rules and regulations.

There are all kinds of landmines awaiting one-participant 401k sponsors. The truth is that it should be more difficult than it is for someone to open these complex business retirement plans. Having to fill out a paper based adoption agreement at last gives a small chance sponsors understand the significance of what they are doing.

I’m not trying to discourage anyone from adopting a one-participant 401k. For most physicians without eligible employees, it still represents the best opportunity for significant tax-advantaged retirement benefits, except for maybe a cash balance plan in middle age. Just don’t treat it like another IRA account and think it is that simple.

Click to expand...

Can I ask you to expand on that a bit?

I know that it sounds like I've screwed up some math, but that is just an arithmetic error it doesn't seem related to particularly arcane rules.

Starting this account was really simple and funding it is as well.

Aside from my math error I never felt like I had a really complex product until you typed that line.

I mean I had a pretty significant amount of IC income this year ~$50k and I can't do a SEP-IRA b/c I do Roth, are you arguing that I should just not try to do solo-401k?

[spiritrider]

mdfamily wrote:

It looks like they all want snail mail for solo 401k, I wonder why.

Click to expand...

Yes, this is correct. This not a trustee/custodian requirement, this is an IRS requirement.

The SEP IRA adoption agreement only controls how the plan's contributions are determined. The individual's SEP IRA account is still fundamentally an Individual Retirement Arrangement (IRA) account. The only thing a custodian does is apply different contribution limits. Other than that, once the funds are in the account, all other IRA rules apply. Therefore, the account opening rules are mostly IRA rules.

Likewise one-participant 401k, is first and fundamentally a 401k account. People tend to think of this as not much different than a SEP IRA except you can make employee deferrals. Nothing could be further from the truth. Your one-participant 401k plan is 99.99% subject to 401k laws, rules and regulations.

There are all kinds of landmines awaiting one-participant 401k sponsors. The truth is that it should be more difficult than it is for someone to open these complex business retirement plans. Having to fill out a paper based adoption agreement at last gives a small chance sponsors understand the significance of what they are doing.

I'm not trying to discourage anyone from adopting a one-participant 401k. For most physicians without eligible employees, it still represents the best opportunity for significant tax-advantaged retirement benefits, except for maybe a cash balance plan in middle age. Just don't treat it like another IRA account and think it is that simple.

[DMFA]

Idk why they insist on dead trees...invested in lumber companies, maybe? But they all seem to want to do it. Maybe some antiquated underlying documentation rules. I don't know, but it seems like only a minor nuisance that is worth a few minutes with Acrobat or a pen and dropping in a mailbox.

[spiritrider]

MPMD wrote:

To the OP remember that with solo 401k you have to put the money in in the calendar year you don’t get a grace period like with Roth IRA so you need to figure this out within 2 weeks if you want to get it done for 2017.

Click to expand...

This is not generally true.

You must adopt a one-participant 401k and make the employee deferral election by 12/31.

However, a sole proprietor has until their tax filing deadline (~4/15) including extensions (~10/15) to make both their employee deferrals and employer contributions.

Only the W-2 deferrals of an S-Corp shareholder-employee must occur on a pay date on or before 12/31. The S-Corp still has until the S-Corp's tax filing deadline (~3/15) including extensions (~9/15) to make the employer contributions.

As I pointed in another current thread, it is dangerous to make your full employer contribution during the tax year. At a minimum you should wait until January and ideally until you have completed your tax return to make your full employer contributions.

[mdfamily]

It looks like they all want snail mail for solo 401k, I wonder why.