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Retirement accounts make my head spin

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  • #16
    Sorry for the back and forth!  I was under the impression that the IRA pro-rata rule is a tax year end calculation.  So after the 2 year waiting period, if I rollover the SIMPLE to a solo 401k prior to 12/31, the SIMPLE won't be included in the year end pro-rata calculation when I make the backdoor Roth conversion?

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    • #17




      Sorry for the back and forth!  I was under the impression that the IRA pro-rata rule is a tax year end calculation.  So after the 2 year waiting period, if I rollover the SIMPLE to a solo 401k prior to 12/31, the SIMPLE won’t be included in the year end pro-rata calculation when I make the backdoor Roth conversion?
      Click to expand...


      Yes, that is correct. You just need to have a zero balance in the SIMPLE account on 12/31.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #18
        Hi JoeP- nice to see another veterinarian on the forum! Although not strictly a retirement account, don't forget about the HSA (stealth IRA as it's referred to on WCI) if you're looking for tax protected space.

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        • #19




          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.
          Click to expand...


          I'm new to this too and I'm having trouble understanding some of this. You say taxable accounts allow for limitless deposits, I thought it was only $54,000 for i401k... could you elaborate??

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          • #20
            GBR225: A solo 401k isn't a taxable account.  the $54000 refers to a solo 401K, and is tax-deferred.

             

            a taxable account is just a brokerage account (like a bank account, that is invested in stocks/bonds).  you can put as much as you want in there.

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            • #21
              Anticipating that the OP will run into this common SIMPLE IRA problem. I am giving a heads up.

              When you join a new employer with a SIMPLE IRA you will have 60 days from when they provide you with the SIMPLE IRA notice/enrollment packet to enroll and select your contribution rate and investment options. While there are plenty of low cost SIMPLE IRA custodians (Fidelity, Schwab, Vanguard, etc...), SIMPLE IRA plans are notorious for expensive investment options. They are often supplied by advisors with front-end loads, high expense ratio funds and/or wrap fees.

              There are two types of SIMPLE IRA plans. The less commonly found type is a 5304-SIMPLE plan. This is the best plan type for employees, because while there maybe a default custodian, each employee can select their own custodian of choice. The employer must deposit employee elective deferrals and employer contributions to each employee's custodian. As you can see, this could be an administrative burden so many employers do not choose this option.

              Most SIMPLE IRA plans are a 5305-SIMPLE plan with a Designated Financial Institution (DFI). There is no reason why such a plan can't name a low cost custodian, but that is rare. However, even if the DFI is a very expensive option, you are not stuck. The two-year limitation on rollovers does not apply to a rollover to another SIMPLE IRA.

              IRS regulations require that a DFI must allow a participant to elect to rollover all employee/employer contributions to another SIMPLE IRA custodian of their choice without cost or penalty at least monthly. This means that even if the DFI normally has front-end loads, they must place you in a fee-free MMF prior to rollover. DFIs often can and only allow election of the rollover option during the initial and yearly enrollment periods.

              Be prepared for enrollment forms already filled out with the DFI as the custodian and "conveniently" no blank forms allowing the rollover option. Do not let this dissuade you from your goal. Also, be prepared for obfuscation and outright deception on the part of the DFI about your ability to do this. This procedure is clearly spelled out in IRS SIMPLE IRA "bible" Notice 98-4.

               

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              • #22


                Most SIMPLE IRA plans are a 5305-SIMPLE plan with a Designated Financial Institution (DFI). There is no reason why such a plan can’t name a low cost custodian, but that is rare. However, even if the DFI is a very expensive option, you are not stuck. The two-year limitation on rollovers does not apply to a rollover to another SIMPLE IRA. IRS regulations require that a DFI must allow a participant to elect to rollover all employee/employer contributions to another SIMPLE IRA custodian of their choice without cost or penalty at least monthly. This means that even if the DFI normally has front-end loads, they must place you in a fee-free MMF prior to rollover. DFIs often can and only allow election of the rollover option during the initial and yearly enrollment periods.

                @spiritrider, I want to make sure I am understanding you correctly. Are you saying that an employee can open a separate SIMPLE IRA, as an individual, for the purpose of rolling over the initial SIMPLE account balance? My understanding is that they must work for another employer who offers a SIMPLE IRA plan to be able to do this - what say you?
                Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                • #23
                  You are right that only an employer can adopt a SIMPLE IRA plan. These are a special class of SIMPLE IRA accounts. These are "rollover only" accounts opened under the employer's SIMPLE IRA plan. The employee has no ability to contribute to this account. It can only accept rollovers. Vanguard calls theirs a "frozen", Other custodians allow similar rollover only accounts.

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                  • #24
                    Redacted... answered my own question.

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                    • #25




                      You are right that only an employer can adopt a SIMPLE IRA plan. These are a special class of SIMPLE IRA accounts. These are “rollover only” accounts opened under the employer’s SIMPLE IRA plan. The employee has no ability to contribute to this account. It can only accept rollovers. Vanguard calls theirs a “frozen”, Other custodians allow similar rollover only accounts.
                      Click to expand...


                      So I did a google search and found that you gave this same answer back in December 2017 - and I even LIKED it lol. Short memory I have.

                      That's interesting and haven't ever had it come up. When we set up SIMPLEs for clients in the past, they were not the high fee accounts of which you speak. The main issue today is how to escape from IRA status for backdoor Roth tax purposes, but it is helpful to know that (again). Maybe this time, it will stick as I will save it to the special secret document on my cpu titled spiritrider advice 8-) .
                      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                      • #26
                        Thank you for the advice, spiritrider. I'm not sure who our provider is for the SIMPLE IRA as I'm not eligible for another month or so, but Im glad I learned before it came up.

                        So if it is a high fee provider, I will be able to set up a separate SIMPLE IRA with a broker I like (prob Schwab), roll it over monthly. Then if I want to do a backdoor Roth in two years, I would have to roll it over again to a solo 401k each year? I think that's what I'm getting from this information. Why they make this more complicated than my full time job I will never understand.

                        Thank you all so much!

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