Hi everyone,
I was hoping to get your thoughts on what I should do in this situation.
For 2015, I received $200k on a W-2 and $15k from a 1099. I anticipate that in 2016, my W-2 income will be slightly higher, around $230k, and my 1099 income about the same. My employer does not provide a retirement plan for me.
Currently, I have about $20k in a Roth IRA and $5,500 in a Traditional IRA. I plan on contributing an additional $5,500 to my Traditional IRA It just occurred to me that because of my 1099 income, I could potentially open a solo 401k or SEP-IRA and put away more.
From what I understand, I can put away much more in a solo 401k, so that makes it more desirable than the SEP-IRA. Unfortunately, it is too late to establish a solo 401k for 2015, so I'll have to wait and do that for 2016.
My question is, what should I do for 2015?
1. Should I open a SEP-IRA for 2015? I can contribute about $3,750 (25% of my 1099 income). Then, I was hoping to do a backdoor conversion of the SEP-IRA and Traditional IRA funds (total $14,750) into my Roth IRA. To my understanding, I would be affected by the pro rata rule for $5,500 (amount in my Traditional IRA currently, that was a pre-tax contribution from 2013). The $3,750 + $5,500 SEP-IRA and Traditional IRA contributions for 2015 would NOT be affected by the pro rata rule because this was after-tax, is that correct?
OR
2. Should I open a SEP-IRA for 2015, contribute $3,750, but NOT do a backdoor Roth conversion for 2015? I would leave the money in the SEP-IRA and Traditional IRA for 2015. In 2016, I would open my solo 401k and rollover the $14,750 in the SEP-IRA and Traditional IRA into it.
Which of these two is better? With either plan, my goal starting in year 2017 is to do a backdoor Roth every year, in addition to putting away as much as possible from the 1099 to the solo 401k.
Any advice would be much appreciated!
I was hoping to get your thoughts on what I should do in this situation.
For 2015, I received $200k on a W-2 and $15k from a 1099. I anticipate that in 2016, my W-2 income will be slightly higher, around $230k, and my 1099 income about the same. My employer does not provide a retirement plan for me.
Currently, I have about $20k in a Roth IRA and $5,500 in a Traditional IRA. I plan on contributing an additional $5,500 to my Traditional IRA It just occurred to me that because of my 1099 income, I could potentially open a solo 401k or SEP-IRA and put away more.
From what I understand, I can put away much more in a solo 401k, so that makes it more desirable than the SEP-IRA. Unfortunately, it is too late to establish a solo 401k for 2015, so I'll have to wait and do that for 2016.
My question is, what should I do for 2015?
1. Should I open a SEP-IRA for 2015? I can contribute about $3,750 (25% of my 1099 income). Then, I was hoping to do a backdoor conversion of the SEP-IRA and Traditional IRA funds (total $14,750) into my Roth IRA. To my understanding, I would be affected by the pro rata rule for $5,500 (amount in my Traditional IRA currently, that was a pre-tax contribution from 2013). The $3,750 + $5,500 SEP-IRA and Traditional IRA contributions for 2015 would NOT be affected by the pro rata rule because this was after-tax, is that correct?
OR
2. Should I open a SEP-IRA for 2015, contribute $3,750, but NOT do a backdoor Roth conversion for 2015? I would leave the money in the SEP-IRA and Traditional IRA for 2015. In 2016, I would open my solo 401k and rollover the $14,750 in the SEP-IRA and Traditional IRA into it.
Which of these two is better? With either plan, my goal starting in year 2017 is to do a backdoor Roth every year, in addition to putting away as much as possible from the 1099 to the solo 401k.
Any advice would be much appreciated!

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