Can I have both a SIMPLE IRA and Solo 401(k)? Solo 401(k) for backdoor ROTH IRA

[dj2020]

I posted this a few hours ago on one of WCI's older Backdoor ROTH IRA posts before I realized we had a community forum right here! So here goes my first post!

KN | January 21, 2018 at 6:29 pm MST

First and foremost, thank you to WCI and this community. This thread is pure gold and epicness! I’ve read this post a few times and have browsed through most of the 1200 comments so forgive me if my situation below has been discussed before.

I am an optometrist who started a SIMPLE IRA for my doctor associates and support staff about 10 years ago. This made sense at the time because the SIMPLE IRA was low cost and low maintenance. I believe it still make sense today as the doctors all contribute but only a handful of my regular staff does. Anyway, thanks to max yearly contributions and the magic of compounding interest, I have a good chunk of my retirement in this tax-deferred bucket. My wife and I had also been contributing to our respective ROTH IRA’s until the income eligibility as a married couple did not allow us to. We also started saving money in a Vanguard taxable bucket.

From reading these posts and others like it, we believe we should also continue to grow our money in the tax-free bucket, aka ROTH IRA. My understanding is we can do this by doing a backdoor ROTH IRA as described in this post. But in order for this to make sense tax-wise and avoid the dreaded “pro-rata” hit, we need to rollover my SIMPLE IRA balance over to maybe a Solo 401(k) and make sure the SIMPLE IRA balance is $0 by 12/31 before I do the 1) $5500 tIRA contribution then 2) backdoor to ROTH IRA.

So after my long-winded set up, here are my questions:

1. Can I get an EIN (sole proprietor) separate from my original practice (S-corp) and open a Solo 401(k)? I believe I have to actually have earned income with this “new” company in order to open the Solo 401(k), so I’ll fill out some surveys or maybe moonlight at some of my colleague’s offices a day or two. The purpose is to have the Solo 401(k) to rollover all my SIMPLE IRA funds. From the posts above, Fidelity’s Solo 401(k) will allow this and I do meet the two year requirement to rollover my SIMPLE IRA to another tax-deferred account without penalty. Too bad Vanguard’s Solo 401(k) does accept this type of rollover as all my accounts are there.

2. Can I have both a SIMPLE IRA with my original practice AND a Solo 401(k) with my “new” sole proprietorship at the same time? I still plan on contributing/maxing out my SIMPLE IRA every year and then rolling over the money to my Solo 401(k) every year right before doing the backdoor tIRA to ROTH IRA method.

3. And if number 2 above is allowed, does my yearly tax-deferred contribution limits go up? Currently my SIMPLE IRA limits me to $12500 as an employee plus an additional up to employer 3% salary match. Now that I have the Solo 401(k) set up, does my contribution limit go up to $18500? Or even higher?

4. Or is everything wrong above and I should re-read this post and all the comments again?    I am open to all suggestions!

Thanks,
KN

[spiritrider]

1. It kind of sounds like you own 100% of this practice. If you own >= 80% of more than one business you are considered a "controlled group".

You can not discriminate against the employees in the practice by having them only eligible to participate in the SIMPLE IRA and you eligible to participate in the one-participant 401k plan.

2. Only if you own < 80% of the practice.

3. If you own < 80% of the practice and you made an employee deferral of $12.5K to the SIMPLE IRA. You could make an employee deferral to the one-participant 401k of up to $6K ($18.5K - $12.5K). This could not exceed your net self-employment earnings = business profit - 1/2 SE tax. You could also make an employer contribution of up to 20% of your net self-employment earnings. However, your employer contribution must be <= (net self-employment earnings - employee deferral) / 2.

4. As you can see. Only if you own < 80% of the practice will you have options this year.

If not, your best bet is to adopt a safe harbor 401k plan for the practice. Unfortunately, you can not have any other employer retirement in the same year you have a SIMPLE IRA. You will have to wait until 01/01/2019 for such a plan to take effect.

Remember you need to provide SIMPLE IRA notification for the next plan year or termination by 11/2. To be safe you will want the safe harbor plan adoption and notifications ready by 10/1.

[dj2020]

Thank you spiritrider! Yes, I own 100% of the practice, therefore the separate company idea with its own solo 401(k) for the sole purpose of SIMPLE IRA rollover to avoid pro-rata hit on the backdoor ROTH IRA conversion won’t work.

I’ll look into a safe harbor 401(k) as suggested. I was just always under the impression that 401(k) involved much more fees, management and contribution rules. The associate docs and myself contribute much more than our support staff.

[litovskyassetmanagement]

It does seem like you have a controlled group.  If you had an equal partner, things would have been quite different.

There might not be a reason to open a 401k plan, unless the following is true:

1) You intend to maximize your own contribution at $55k (and potentially employ a spouse in the practice for an even higher contribution)

2) Demographics is favorable for you to max out without spending a lot on staff.

With a 401k plan, however, you might be able to exclude your associates from profit sharing, while providing them with a 4% match, but only if they are HCEs ($120k or more).  The staff might also need to get something as well if you want to max out yourself.  Prior to deciding on whether you want a 401k with profit sharing, a comprehensive design study would have to be completed.

If the intention is to do a 401k with just the safe harbor match, I don't see a big reason to do that for the sole idea of doing backdoor Roth.  That's too small of a reason to make such a big change in your plan.  So while you will have higher salary deferral limit, your match will also increase from 3% to 4%, and 401k plans are actually a lot more complex than SIMPLE IRA, so for that reason I wouldn't change from a SIMPLE unless you can benefit significantly by increasing your own contribution.

In any case, you have to run your SIMPLE for the entire 2018 before you can change to a 401k plan for 2019, so there is plenty of time to do the analysis.

This article will give you some ideas as to how to decide on whether a 401k or a SIMPLE IRA is a better choice:

http://www.dentaltown.com//Dentaltown/Article.aspx?i=403&aid=5625

But I already see potential complications if your associates are not HCEs and if you can't max out the plan yourself.  From my experience, optometrists are better served with a SIMPLE unless you are highly profitable and your income is in the highest tax brackets.