Retirement accounts make my head spin

[JoeP]

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!

[jfoxcpacfp]

spiritrider wrote:

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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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-) .

[sthealth_wealth]

Redacted... answered my own question.

[spiritrider]

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.

[jfoxcpacfp]

spiritrider wrote:

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?

[spiritrider]

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.

 

[CrockettsRiver]

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.

[gbr225]

Side Hustle Scrubs wrote:

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.

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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??

[FinancialWellnessDVM]

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.

[jfoxcpacfp]

JoeP wrote:

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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Yes, that is correct. You just need to have a zero balance in the SIMPLE account on 12/31.

[JoeP]

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?

[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.

[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]

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.

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

[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.

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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!

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