Retirement accounts make my head spin

[JoeP]

Hoping to get some retirement account advice-pretty much every tax/retirement professional I've talked to gives me either conflicting information or information I know to be wrong.  I'm a young veterinarian moving through the ranks, and as a veterinary doctor my total life earnings potential is much lower than most of you are used to, but with similar loan burden, so I'm trying to play my financial cards as best I can.

I started low income as most do, using a Roth IRA with no 401k option.  My second year in the workforce I moved past the Roth IRA limit, to a company with a 401k after a year of work, and started accumulating funds for a backdoor Roth conversion.  About 6 months in to being an employee at that company (prior to 401k eligibility) I am moving to a company with much higher pay/better schedule, but offers a SIMPLE IRA.  From what I know if I contribute to the SIMPLE IRA I will get killed on the pro rata rule if I were to do a conversion this year.  Any input on what's best to do with the accumulated trad IRA money?  My only thought is to hold onto it until I potentially get a 401k, roll the SIMPLE into the 401k, and do a conversion then, and pay taxes on any gains between now and then.

Does anyone know of any tax shields I'm not taking advantage of?  Potentially trying to start a side business doing something low income, and opening a solo 401k?  As it is the SIMPLE IRA limits are way too low, and since that is going to mess up my backdoor Roth plans, I'm left with only $12500 (plus 3% employer contribution) of tax shielding each year.  Should I keep contributing the post tax $5500 to the traditional IRA with hopes of doing a rollover someday in the future?

Thank you very much to anyone that has any input!

[Hatton]

Do not be afraid to open a taxable account.  You can accumulate lots of money with one.

[Side Hustle Scrubs]

Any side job that generates 1099 income would allow you to open a solo 401k and rollover a pretax IRA to clear the path for Roth conversions.

hatton1 is right though - you can put limitless money in a taxable account and invest in low cost tax efficient index funds. The only limit is how much you want to work and save. Plus you get to take advantage of favorable long term capital gains rates.

[Peds]

JoeP wrote:

Hoping to get some retirement account advice-pretty much every tax/retirement professional I’ve talked to gives me either conflicting information or information I know to be wrong.  I’m a young veterinarian moving through the ranks, and as a veterinary doctor my total life earnings potential is much lower than most of you are used to, but with similar loan burden, so I’m trying to play my financial cards as best I can.

I started low income as most do, using a Roth IRA with no 401k option.  My second year in the workforce I moved past the Roth IRA limit, to a company with a 401k after a year of work, and started accumulating funds for a backdoor Roth conversion.  About 6 months in to being an employee at that company (prior to 401k eligibility) I am moving to a company with much higher pay/better schedule, but offers a SIMPLE IRA.  From what I know if I contribute to the SIMPLE IRA I will get killed on the pro rata rule if I were to do a conversion this year.  Any input on what’s best to do with the accumulated trad IRA money?  My only thought is to hold onto it until I potentially get a 401k, roll the SIMPLE into the 401k, and do a conversion then, and pay taxes on any gains between now and then.

Does anyone know of any tax shields I’m not taking advantage of?  Potentially trying to start a side business doing something low income, and opening a solo 401k?  As it is the SIMPLE IRA limits are way too low, and since that is going to mess up my backdoor Roth plans, I’m left with only $12500 (plus 3% employer contribution) of tax shielding each year.  Should I keep contributing the post tax $5500 to the traditional IRA with hopes of doing a rollover someday in the future?

Thank you very much to anyone that has any input!

Click to expand...

so stop doing and nondeductable trad IRA for now.

does your SEPIRA allow for yearly roll-overs? i think this is rare but possible.

can you ask your employer to change to a 401k? also seems rare.

otherwise, its SEPIRA, and taxable.

dont forget your spouse (if applicable) can continue to do their backdoor rIRA as your SEP does not affect them.

[ajm184]

Rolling money out of a Simple IRA can become problematic as an active employee.  Most Simple IRA's have a minimum 2 year holding period for an active employee.  Suggestions to consider:

a. Use a taxable account as other have stated.   This money can serve as stash of funds to convert other tax deferred retirement funds to non-taxable at a later date.

b. Focus on getting a good mix of investment choices and cost within the Simple IRA you will be contributing.  Simple IRA's appear (imo) to be a bit more susceptible to a local higher cost adviser.  Though you will not likely be able to get your employer to move towards a 401K, a  good Simple IRA is still an effective tax deferred retirement tool.

[jfoxcpacfp]

SIMPLE IRAs belong to the participant, 100%. Rollovers during the first 2 years are subject to a 25% penalty (unless to another SIMPLE IRA) but after that, there is no penalty. I see no good reason to bypass a $12,500 contribution with 3% match annually. In the meantime, @hatton1 is correct about the taxable account.

[Complete_newbie]

Gonna chime in and say retirement accounts beyond 401K, TIRA/roth ( like SEPIRA, solo k etc) do give me a headache. For whatever reason these rules and limits etc feel arbitrary and confusing. Is there an "ultimate" guide/post about all these accounts somewhere ? Would love a head to head clear picture with examples. Big believer in set and forget so these nuances seem to crop up whenever I look at any account.

[Ray]

As hatton1 and SHS mentioned above, taxable accounts are great.  Despite the disconcerting name, the actual tax burden can be made very minimal if you invest in the right type of funds (for instance the vanguard total stock market index fund).  Additionally, these accounts have some distinct advantages over tax sheltered accounts such as flexibility and simplicity.

-Ray

[Hatton]

The best advice is to know what is available to you personally.  You need to read and study that account.  You need to study again if you change jobs.  There is no reason to learn the minutiae about accounts that are not available to you.  (Obviously if you are a PF blogger or an actual financial advisor you need to understand all account types.)  The best plan is to max out whatever is available and then start funding a taxable account.  My taxable account dwarfs my actual retirement accounts.  Set this up in your 30s and you will be on a great glide path to retirement.

[Complete_newbie]

hatton1 wrote:

The best advice is to know what is available to you personally.  You need to read and study that account.  You need to study again if you change jobs.  There is no reason to learn the minutiae about accounts that are not available to you.  (Obviously if you are a PF blogger or an actual financial advisor you need to understand all account types.)  The best plan is to max out whatever is available and then start funding a taxable account.  My taxable account dwarfs my actual retirement accounts.  Set this up in your 30s and you will be on a great glide path to retirement.

Click to expand...

Yea I'm headed that way too in terms of taxable dwarfing the retirement. You are right; its effort and repetition. Its just some of the topics on the forum I'd like to follow up I lose it quick in nuances when it comes to solo-k and SEP-IRA and the rules etc. Use it or lose it. I read about them, get it, then since I don't use SEP-IRA someone asks as questions and I am mostly...errr.. dunno!

[JoeP]

Thank you everyone for the input!  I do have a taxable account which I've used to some extent, invested in a three fund lazy portfolio with Schwab (I tried Vanguard and found their customer service horrible compared to Schwab).  Also I live in the high tax state of California, and my spouse also works and does her own Roth IRA conversion on top of her 401k.

I'm interested in the solo 401k.  I do some relief work and have a small amount of 1099 income.  The Simple IRA rollover wont be an option for me for at least 2 years as others have stated, but as long as I'm at this job a rollover still wouldn't allow for a backdoor Roth as I would have to rollover the simple IRA, then take a year off of using it, which would leave more money on the tablet than just continuing with the simple IRA.  So I guess for now I will just stop using the traditional IRA and let it sit for a future conversion if I ever leave the job with the simple?

Question: If I open a solo 401k based on my 1099 income, is it allowed to put W2 monies into the solo 401k, or would it be solely for monies from the 1099 income stream?  My 1099 income isn't large enough to make it worth opening a 401k just for that stream, and I won't be able to use it for a rollover for years.

Thank you everyone again!

[Hatton]

If you are actually getting side income in any significant amount or change jobs then learn about SEP/IRA versus solo-k.  Otherwise it is irrelevant to you.  I have had several different account types so I know about them.  I do not read posts on backdoor Roths because I know I can't do one.  I do read about Roth conversions because I am doing them.  I really do not know much about Simple IRAs so I did not comment.

Complete_newbie wrote:

hatton1 wrote:

The best advice is to know what is available to you personally.  You need to read and study that account.  You need to study again if you change jobs.  There is no reason to learn the minutiae about accounts that are not available to you.  (Obviously if you are a PF blogger or an actual financial advisor you need to understand all account types.)  The best plan is to max out whatever is available and then start funding a taxable account.  My taxable account dwarfs my actual retirement accounts.  Set this up in your 30s and you will be on a great glide path to retirement.

Click to expand…

Yea I’m headed that way too in terms of taxable dwarfing the retirement. You are right; its effort and repetition. Its just some of the topics on the forum I’d like to follow up I lose it quick in nuances when it comes to solo-k and SEP-IRA and the rules etc. Use it or lose it. I read about them, get it, then since I don’t use SEP-IRA someone asks as questions and I am mostly…errr.. dunno!

Click to expand...

 

[jfoxcpacfp]

JoeP wrote:

Question: If I open a solo 401k based on my 1099 income, is it allowed to put W2 monies into the solo 401k, or would it be solely for monies from the 1099 income stream?  My 1099 income isn’t large enough to make it worth opening a 401k just for that stream, and I won’t be able to use it for a rollover for years.

Click to expand...

Can't use your w2 income, just your IC earnings. What amount is "isn't large enough"?

[JoeP]

My 1099 income is only around $5k per year vs my W2 income in the six figures.  I guess I could put the 1099 income solely into a solo 401k, although at some point the complexity of having 3-4 different retirement accounts begins to outweigh the value for me.  That may change as I learn more and this becomes more second nature.  Thank you again!

[jfoxcpacfp]

$5k is enough. You can go ahead and contribute to nondeductible IRAs and let them sit until you've had the SIMPLE for 2 years and then roll out your balance annually before 12/31 of the year you convert. Extra trouble, but you'll get that free 3% match and you'll have your backdoor Roth, too.