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  • Solo401k quick question

    This website has been very helpful. Quick question, I have maximized my 401k at my work (18k employee contribution with 5% employee match, for a total of 29k invested). I also made about 70k from my contractor income and want to do a backdoor Roth for my wife and I. I think a solo401 would be best.

    I spoke to my financial advisor and he said I needed to create an s cooperation in order to contribute the employer contribution (which will be nearly 11k) for the solo401k? Is that true?

    Second question, do you need to set up the solo401k in the calendar year, so for the 2017 tax year it would have to be before December 31st? When can you make contributions until?

  • #2
    Your financial adviser is wrong. You can set up a solo 401k being a sole proprietor. You can contribute up to 20 percent of your profit from your independent contractor work into a solo 401k. All you need is a EIN number.

    Regarding your second question, yes you need to set up the solo 401k in the same calendar year. So you may be too late for the 2017 year as mine took close to 15 days to set up. Even in this day and age most of the companies want you to send a paper application and are very slow to set it up. The trick is setting up the account. You can make and should make contributions to it only in 2018 as if you make excess contributions you can reclassify it to the next year.

    The way to get around your problem may be is to wait till next year. Then open a SEP IRA. Then make a SEP IRA contribution for the 2017 year in 2018 as its deadline is April. Then in the mean time open a solo 401k. Then roll the SEP IRA funds into the new 401k. After you rolled all the funds into the solo 401k then do the back door Roth for 2018.

    I am not an expert in any of this so definitely check with a good financial adviser or guys on this forum who are better than me regarding my SEP IRA strategy. Sadly the present financial adviser you have seams to be giving you bad advise.

     

     

    Comment


    • #3




      This website has been very helpful. Quick question, I have maximized my 401k at my work (18k employee contribution with 5% employee match, for a total of 29k invested). I also made about 70k from my contractor income and want to do a backdoor Roth for my wife and I. I think a solo401 would be best.

      I spoke to my financial advisor and he said I needed to create an s cooperation in order to contribute the employer contribution (which will be nearly 11k) for the solo401k? Is that true?

      Second question, do you need to set up the solo401k in the calendar year, so for the 2017 tax year it would have to be before December 31st? When can you make contributions until?
      Click to expand...


      The bolded part is absolutely freaking wrong.  In fact, his factoring of the contribution is probably also wrong.  Please tell me you don't actually give this guy money...anyone with self-employed income can start a 401(k), sole prop or S-corp.  An S-corp is an awful idea for someone who also has W-2 income because it causes you to be responsible for the 6.2% employer portion of SS tax on your S-corp earnings up to $127,200.

      However, it's probably going to be too late for you to start a 401(k) for 2017 since things have to be snail-mailed or taken to a brick-and-mortar because of antiquated red tape.  If it were already open and effective, you could contribute *in* 2018 prior to 4/15 *for* 2017, but since it's not open or effective yet, you can't contribute to it for money that was earned prior to its effective date (at least for employee contributions, and some places might not want you to do employer contributions that way either).  SEP-IRAs, on the other hand, can be done entirely online and be done very quickly as well, and aren't subject to that restriction; even if it were opened in 2018, you could still contribute for prior year.

      For that reason, what I've been recommending to people trying to put away self-employed money so late in the year is to do this:

      • Start SEP-IRA for 2017. Contribute 20% net profits to it in 2018 *for* 2017 (can be done before 4/15/2018).

      • Start individual 401(k) with effective date 1/1/2018.

      • Do your non-deductible traditional IRA contributions for the backdoor Roths as you usually would for 2017 (can be done before 4/15/2018) and 2018.  It's probably too late in the year for any conversion to take place prior to 12/31/2017, so the 12/31 balance rule for pro rata taxation probably won't matter.

      • Convert your non-deducted traditional IRA contributions to Roth in 2018.

      • Rollover the SEP-IRA into the individual 401(k) in 2018.

      • Contribute to the 401(k) from that point forward


      It's a bit more complicated than you might usually do, but 401(k)s can just get a little clunky because they're mired in red tape which SEPs aren't.

      Now, as for the amount you can contribute to the self-employed account, it's 20% of net profits which is defined as earnings, minus expenses, minus half self-employment tax.  Your self employment tax has a 7.65% exemption, so it will be (income - expenses) * 0.9235 * 0.029 = 2.68%.  You can contribute 20% of that, so the number you'll multiple your (income - expenses) by is 0.2 * 0.9866 = 0.197.  So if you have $10,000 of business expenses on Schedule C after that $70,000 of earnings for $60,000 profit, you can contribute $11,820.

      Comment


      • #4
        Thanks DMFA. Just a bit of clarification on the backdoor Roth IRA and SEP-IRA. You mentioned that it’s too late for the conversion from the traditional IRA to Roth IRA to occur. Does that mean I can’t do the Roth IRA for 2017? If suppose I can do the conversion before 12/31, will it impact me pro rata wise if I open the SEP-IRA to use for 2017.

        I’m hoping to do the backdoor Roth IRA for my spouse and I for 2017 while making the pretax deductions for my contractor income (SEP-IRA).

        Comment


        • #5
          I sent in the paperwork to open a solo 401k through etrade last week. I was concerned it would not be opened before the end of 2017, however I called and they said even if it does not "officially" open before the end of the year I can still contribute by 4/15/2018. They said the can have the account "open" based on what adoption date is written on the application. Hopefully this is true.

           

           

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          • #6




            Thanks DMFA. Just a bit of clarification on the backdoor Roth IRA and SEP-IRA. You mentioned that it’s too late for the conversion from the traditional IRA to Roth IRA to occur. Does that mean I can’t do the Roth IRA for 2017? If suppose I can do the conversion before 12/31, will it impact me pro rata wise if I open the SEP-IRA to use for 2017.

            I’m hoping to do the backdoor Roth IRA for my spouse and I for 2017 while making the pretax deductions for my contractor income (SEP-IRA).
            Click to expand...


            I specifically said you can do it. "Backdoor Roth" is a two-step process: a non-deducted traditional IRA contribution and a Roth conversion. Where pretax IRAs factor in and can cause a hindrance is if you have pretax money in Traditional IRA, SEP-IRA, or SIMPLE-IRA accounts on 12/31 of the year the conversion occurs, then the non-deducted contribution, which should not be taxed on conversion because it's already been taxed and not deducted, becomes taxed based on the percentage of pre and post-tax money in those accounts. Contributions can be made for a tax year until tax day the following year; hence you can make the 2017 contribution any time before 4/15/2018.

            Basically, you could even make both your 2017 and 2018 contributions and conversions on the same day in 2018. You'd report the contribution for 2017 on your 2017 taxes due 4/15/18, and report the contribution for 2018 and the conversion on your 2018 taxes due April 2019.

            Now, like I said, the only day that matters what you have in your SEP-IRA vis-à-vis the Backdoor Roth is on 12/31 in a year in which a Roth conversion occurs. If you're not converting anything to Roth in 2017, it doesn't matter what your balance is on 12/31/2017. It also means you have until April 2018 to contribute to a SEP-IRA for 2017 and until 12/31/2018 to rollover the SEP to the 401(k).

            Clear as mud?

            https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

            Comment


            • #7




              I sent in the paperwork to open a solo 401k through etrade last week. I was concerned it would not be opened before the end of 2017, however I called and they said even if it does not “officially” open before the end of the year I can still contribute by 4/15/2018. They said the can have the account “open” based on what adoption date is written on the application. Hopefully this is true.

               

               
              Click to expand...


              This is probably just for employER contributions since no elective deferral can occur prior to the adoption date. If they let you do it, great. It's probably fine to try. I'd try that in January and give them some time to make sure it's kosher because they take a while to clear anyway. If not, then you can still go back, start a SEP-IRA, and just roll it right over to the 401(k) once it gets up and running.

              Comment


              • #8
                I also opened a solo 401K with Etrade.  It wasn't too difficult.  It takes 2-3 business days to hear back from them.  You can fax the application in. Just remember that you will have to submit 2 applications [same paper work, only the first page will be different] if you want the roth option as well.  And as mentioned above, as long as you open up the soloe 401K this year, you still have time into the new year to contribute both roth and non-roth funds

                Comment


                • #9
                  Fidelity...I walked my solo401k paperwork into their physical office (Seattle) and the account was opened the NEXT business day (although they said 2-3 days).  Call their number 800)%20544-5373" target="_blank" rel="noopener">800-544-5373 and someone will walk you through the pdf application.  You can also next day air it to their office in Cincinnatti.

                   

                   

                  Comment


                  • #10
                    Bumping this up with another quick (I hope) question.

                    I see patients 3 hours a week in a well established private practice. They provide all the infrastructure for me and keep 25% from collections - pretty simple arrangement. I get 1099 income. I opened a solo 401k at the end of 2017 with PAi, who is apparently the record keeper for Bank of America Merril Edge 401k plans. Things went pretty smooth, I thought, they obtained an EIN for me and I thought is over.

                    Now they are asking me for a "Certificate of Good Standing" for my "business entity". There is no business entity, is just me and my small 1099 income. The private practice where I work does not offer any retirment plans and they don't even want to know or be involved in all this (I did ask if is OK to open the retirement account from my income and they said OK).

                    Anybody knows what this certificate of good standing is and if I actually need it since there is not business entity to speak of? They directed me to this link :

                    http://dat.maryland.gov/businesses/Pages/Internet-Certificate-of-Status.aspx

                    but there they talk about bussiness registered with the Department of Taxations and so forth. I do not think it applies.

                    Thank you

                    Comment


                    • #11
                      Tell them to read their own link.

                      "Certificates are not available for trade names, name reservations, sole proprietorships"

                      You are a sole proprietor. There is no need for, nor is there a "Certificate of Good Standing" available.

                      Why would you possibly adopt a one-participant 401k plan at a full service broker that charges a start-up fee, a monthly participant fee, AUM administrative fees and no doubt a financial advisor fee???? Nevermind the expense ratios of the funds that are likely offered.

                      Especially, when there are several one-participant 401k plan providers that charge no startup or ongoing fees. Who offer the lowest expense ratios funds.

                      Comment


                      • #12
                        Long story and bad experience with Merril Edge. 2 years ago my CPA told me to open either a solo 401k or a SEP IRA for tax sheltering purposes.  I told him I've been doing back door roth IRA conversions for 4 years now and he said I can continue to do them with either one (I know!!). He said SEP IRA is much easier, just go to any bank. I work with Bank of America so went there and he was right about that, took me a few minutes and opened the SEP IRA. Last year I contributed again and again I did back door roth IRA. I have about $66k there now.

                        In December (2017) we started looking for a FA. In the process I learned a lot more and realized about the snafu. The CPA just raised his shoulders. I will probably fire him and put it on somebody else how to settle things with IRS about the past 2 years of doing back doors with $5,500 while having $66k sitting in a SEP IRA.

                        Took it upon myself to rollover the SEP into a solo 401k. Went to same bank and told them I want to roll it over fast before December 31st so January 1 I have no more SEP and can do the backdoor. I thought Merril Edge handles solo 401k too so doing it within the same institution will be easy and fast.

                        It was not. They have a 3rd part "record keepers" PAIs. I started the process with them without realizing all the fees. Now the account is not active yet, they ask ME to get papers from Merril Edge and send it to them (when they are the solo 401k administrators for Merril Edge accounts!) and the check left the SEP IRA on January 2nd.

                        Will probably finish the process with PAI then get my money out and roll them over somewhere else (open another solo 401k somewhere else).

                        Somebody above suggested Fidelity. I have my work 403b with them, will give them a call.

                        Comment


                        • #13




                          Long story and bad experience with Merril Edge. 2 years ago my CPA told me to open either a solo 401k or a SEP IRA for tax sheltering purposes.  I told him I’ve been doing back door roth IRA conversions for 4 years now and he said I can continue to do them with either one (I know!!). He said SEP IRA is much easier, just go to any bank. I work with Bank of America so went there and he was right about that, took me a few minutes and opened the SEP IRA. Last year I contributed again and again I did back door roth IRA. I have about $66k there now.

                          In December (2017) we started looking for a FA. In the process I learned a lot more and realized about the snafu. The CPA just raised his shoulders. I will probably fire him and put it on somebody else how to settle things with IRS about the past 2 years of doing back doors with $5,500 while having $66k sitting in a SEP IRA.

                          Took it upon myself to rollover the SEP into a solo 401k. Went to same bank and told them I want to roll it over fast before December 31st so January 1 I have no more SEP and can do the backdoor. I thought Merril Edge handles solo 401k too so doing it within the same institution will be easy and fast.

                          It was not. They have a 3rd part “record keepers” PAIs. I started the process with them without realizing all the fees. Now the account is not active yet, they ask ME to get papers from Merril Edge and send it to them (when they are the solo 401k administrators for Merril Edge accounts!) and the check left the SEP IRA on January 2nd.

                          Will probably finish the process with PAI then get my money out and roll them over somewhere else (open another solo 401k somewhere else).

                          Somebody above suggested Fidelity. I have my work 403b with them, will give them a call.
                          Click to expand...


                          You should not intermingle the new backdoor Roth with the old one - that will make the process of correcting the past couple of years simpler. You said you would "probably" fire your CPA. What he advised and how he reacted is, imo, unforgivable. Why "probably"?
                          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                          Comment


                          • #14
                            Hello! First time poster here and I'd like to thank everyone for contributing to the wealth of knowledge on this forum!

                            Very briefly, I'm a doc in my third year after fellowship and would like to get some of my 1099 income from 2017 into a Solo 401k. I've missed the deadline to open a Solo 401K for 2017 but would like to follow the above strategy by opening a SEP IRA for 2017 right now in January 2018 and then rolling it over to the soloK once I have that opened through Vanguard in the next month or two before April. However, I have already contributed to my traditional IRA on Jan 1 and initiated the backdoor rollover to my Roth IRA for 2018. Once that completes this week, all my IRA funds will be in my Roth (backdoor contributions from 2016, 2017, and 2018).

                            1) My question is regarding the timing, is it still acceptable to open a SEP IRA for 2017 after I've already completed back door for 2017 and 2018?

                            2) Also, since I've maxed out my elective deferral to 401k from my W2 employer for 2017, I should still be able to contribute 19.7% of my net profits to the soloK from my 1099 according to DMFA calculations above?

                            Thank you! -Dima

                            Comment


                            • #15




                              Hello! First time poster here and I’d like to thank everyone for contributing to the wealth of knowledge on this forum!

                              Very briefly, I’m a doc in my third year after fellowship and would like to get some of my 1099 income from 2017 into a Solo 401k. I’ve missed the deadline to open a Solo 401K for 2017 but would like to follow the above strategy by opening a SEP IRA for 2017 right now in January 2018 and then rolling it over to the soloK once I have that opened through Vanguard in the next month or two before April. However, I have already contributed to my traditional IRA on Jan 1 and initiated the backdoor rollover to my Roth IRA for 2018. Once that completes this week, all my IRA funds will be in my Roth (backdoor contributions from 2016, 2017, and 2018).

                              1) My question is regarding the timing, is it still acceptable to open a SEP IRA for 2017 after I’ve already completed back door for 2017 and 2018?

                              2) Also, since I’ve maxed out my elective deferral to 401k from my W2 employer for 2017, I should still be able to contribute 19.7% of my net profits to the soloK from my 1099 according to DMFA calculations above?

                              Thank you! -Dima
                              Click to expand...


                              I'm on a similar boat. I earn both W2 and 1099. On the W2, I maximized my 401k in 2017. I also did backdoor Roth in 2017. Didn't have a solo 401k for my 1099 income and now wondering if I can open a SEP IRA for the 2017 1099 income. Thanks.

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