solo 401k dilemma

[PTM]

I am an employed doc in high paying sub-specialty with an employer-sponsored 401k where I defer the max $18k plus employer contribution of $24k (not sure if its pertinent, but I also max out a backdoor roth IRA annually).

I lucked into a side gig as a consultant for biotech company this year which paid me $7,800  (less $800 in expenses).  It may be the same in 2018, but I'm hoping it will be a bit higher.  I am interested in saving as much in taxes as possible so started thinking about setting up a solo 401k plan to shelter as much as I can.

I know WCI has written about this before and there are prior forum posts, but curious what you would do in this situation.  It seems that my window of opportunity to set up a 401k has closed for the year but I could still do SEP-IRA.  Would that just complicate things if I planned to change to a solo-401k in the future?  I am starting to wonder if it is it even worth it at all, as it seems that I would only be able to save ~$1500 in either account?

And a related question, if I do consulting for multiple companies can all of that income be considered as proceeds from one "consulting business?"

Thanks in advance for your feedback!

[jfoxcpacfp]

1. Do the SEP then the solo-k.


2. All one consulting business.

I look at a solo-k as an ace in the hole. You never know when it would be handy to have a solo-k to r/o a 401k or 403b out to (i.e. if you change day jobs) so I see the main advantage as one of capitalizing on that opportunity rather than saving taxes.

Remember that you can contribute only 20% of your net profits from the side gig, and this is also net of 1/2 of Medicare taxes.

[PTM]

good point about the other advantage of the solo-401k!

If I do the SEP-IRA this year, how "sticky" does that make things next year?  Can I just roll that into my solo?  Does it interfere with Roth-IRA contributions or backdoor conversions?

[jfoxcpacfp]

Not sticky at all. Just roll into your solo for 2018 before 12/31/18. You only have to worry about the last day of the year and that's for conversions only. You can make the nondeductible contribution any time you want. You just need to have zero pre-tax IRAs on the last day of the year that you convert the n.d. IRA to a Roth.

Explaining Backdoor Roth IRAs

[cgossage]

PTM wrote:

good point about the other advantage of the solo-401k!

If I do the SEP-IRA this year, how “sticky” does that make things next year?  Can I just roll that into my solo?  Does it interfere with Roth-IRA contributions or backdoor conversions?

Click to expand...

You can just roll it into your solo.  It's a relatively simple process.  The SEP will interfere with your ability to make Backdoor Roth contributions since a portion of the SEP account will be converted as well.  Simply rolling the SEP into a solo-k alleviates this problem and you are free to resume making Backdoor Roth Contributions.

[DMFA]

PTM wrote:

I am an employed doc in high paying sub-specialty with an employer-sponsored 401k where I defer the max $18k plus employer contribution of $24k (not sure if its pertinent, but I also max out a backdoor roth IRA annually).

I lucked into a side gig as a consultant for biotech company this year which paid me $7,800  (less $800 in expenses).  It may be the same in 2018, but I’m hoping it will be a bit higher.  I am interested in saving as much in taxes as possible so started thinking about setting up a solo 401k plan to shelter as much as I can.

I know WCI has written about this before and there are prior forum posts, but curious what you would do in this situation.  It seems that my window of opportunity to set up a 401k has closed for the year but I could still do SEP-IRA.  Would that just complicate things if I planned to change to a solo-401k in the future?  I am starting to wonder if it is it even worth it at all, as it seems that I would only be able to save ~$1500 in either account?

And a related question, if I do consulting for multiple companies can all of that income be considered as proceeds from one “consulting business?”

Thanks in advance for your feedback!

Click to expand...

1. Open SEP-IRA


2. Make SEP-IRA contribution for 2017.  Max is income minus expenses (Sched C line 31), minus half self-employment tax (Sched SE long, line 13), divided by 5.  So for you, that's (7,000 - 94) / 5 = $1,381.


3. Open SE 401(k) with effective date 1/1/2018 at a brokerage that allows incoming rollovers (Fido, Schwab, TDA...p much just not Vanguard, and ideally same as your SEP-IRA)


4. Do your backdoor Roths as usual for 2017 (if you haven't already) and 2018.


5. Rollover your SEP-IRA into your SE 401(k) prior to 12/31/2018.  As long as you do this, your backdoor Roth will remain unaffected


6. Make employer contributions for 2018 and onward to your SE 401(k) of 20% of net profits minus half SE tax

...we're talking $1,381 or so here, not even enough to hit the minimum buy-in on several mutual funds (could do ETFs though).  So it's not the most crucial thing in the world to catch up with that 2017 contribution, but hey, it's nonzero, and that deduction could put another $400-500 or so into your pocket.  Might as well go for it.

[Newbiebbq]

For someone like the OP, I would assume they would "max out" their SS tax ($127,200) with their W2 job. Wouldn't that mean he would not have self employment tax on his 1099 income other than the 2.9% medicare tax?

[DMFA]

Newbiebbq wrote:

For someone like the OP, I would assume they would “max out” their SS tax ($127,200) with their W2 job. Wouldn’t that mean he would not have self employment tax on his 1099 income other than the 2.9% medicare tax?

Click to expand...

Yep. And you get a 7.65% exemption on self-employment tax. So 7000 * 0.9235 * 0.029 = $188. You reduce net profits by half of SE tax to figure the maximum contribution, hence (7000 - 188÷2) * 0.20 = $1,381. See Schedule SE, long form, part I, and IRS Pub 560.

...does your math show something different?

[PTM]

wow, thanks for all the great advice here, especially the step by step approach.  two questions comes to mind:

1.  can I still do a SEP-IRA for 2017 even tho I already funded $5500 to Roth IRA

2.  why not vanguard?  I have all my other accounts thru them!

[DMFA]

1. Yes. A SEP has separate limits from Traditional and Roth IRAs.

2. Vanguard's individual 401(k) does not accept incoming rollovers and has a few other minor limitations. Now, I know that one can not make elective deferrals (aka employee contributions) prior to the effective date of opening a 401(k). I do not know if this applies to employER contributions, which is what you'd be making. You *might* be able to skip that step entirely, and just make the 2017 contribution directly. You should ask Vanguard this specifically.

[Hank]

Newbiebbq wrote:

For someone like the OP, I would assume they would “max out” their SS tax ($127,200) with their W2 job. Wouldn’t that mean he would not have self employment tax on his 1099 income other than the 2.9% medicare tax?

Click to expand...

It's $128,400 in 2018.

[spiritrider]

DMFA wrote:

1. Yes. A SEP has separate limits from Traditional and Roth IRAs.

2. Vanguard’s individual 401(k) does not accept incoming rollovers and has a few other minor limitations. Now, I know that one can not make elective deferrals (aka employee contributions) prior to the effective date of opening a 401(k). I do not know if this applies to employER contributions, which is what you’d be making. You *might* be able to skip that step entirely, and just make the 2017 contribution directly. You should ask Vanguard this specifically.

Yes, it also applies to 401k employer contributions. It follows from a sequence of requirements.

• You can not make either 401k employee deferrals or employer contributions prior to the effective date of a 401k.


• You can not make the effective date of a 401k prior to 1/1 of the year of you adopt the 401k.


• You can only make contributions based on earned income received after the effective date of the 401k.


• Therefore, you can not make any contributions for the prior tax year unless you adopt a 401k by 12/31 of that year and the effective date is <= the date of the earned income you want to base the contributions on.

On the other hand you can adopt a SEP IRA and make contributions for the 2017 tax year up until the tax filing deadline (04/17/18) including extensions (10/15/18).

[DMFA]

spiritrider wrote:

DMFA wrote:

1. Yes. A SEP has separate limits from Traditional and Roth IRAs.

2. Vanguard’s individual 401(k) does not accept incoming rollovers and has a few other minor limitations. Now, I know that one can not make elective deferrals (aka employee contributions) prior to the effective date of opening a 401(k). I do not know if this applies to employER contributions, which is what you’d be making. You *might* be able to skip that step entirely, and just make the 2017 contribution directly. You should ask Vanguard this specifically.

Yes, it also applies to 401k employer contributions. It follows from a sequence of requirements.

• You can not make either 401k employee deferrals or employer contributions prior to the effective date of a 401k.


• You can not make the effective date of a 401k prior to 1/1 of the year of you adopt the 401k.


• You can only make contributions based on earned income received after the effective date of the 401k.


• Therefore, you can not make any contributions for the prior tax year unless you adopt a 401k by 12/31 of that year and the effective date is <= the date of the earned income you want to base the contributions on.

On the other hand you can adopt a SEP IRA and make contributions for the 2017 tax year up until the tax filing deadline (04/17/18) including extensions (10/15/18).

Click to expand...

That's what I thought. I had SGOTI tell me otherwise about opening the account the following calendar year, and I didn't believe it. Although that might have been in reference to ramrodding a SE 401(k) open at a physical brokerage location in the final week of December (12/29 last year).

[littlefish]

it's a total bummer that Vanguard does not allow IRA rollover contributions to a solo 401k as all of my other accounts are with them. is there anyway to open a solo 401k with another brokerage.. rollover a traditional IRA into this account, and then transfer it back to Vanguard?

[PTM]

excellent discussion--Thank you all for the valuable feedback!