Solo 401k Plan for 1 year only

[KMAC]

So I am currently a 1099 independent contractor with an income of $240k. Until this point, I have been putting most of my extra money towards student loans. I have a backdoor roth IRA but have not set up any other type of retirement account for myself. Right now, I have no employees. But in 2018, I will have about 10 employees as I will be purchasing an existing business.

I would like to put some tax protected money into a retirement account for this year, but it sounds like my only option is to set up a Solo 401k. I don't want to do an IRA because I have the backdoor roth IRA so I can't have any other IRA money in an account come December 31st.

I know if I set up a solo 401K, I will only use it for 2017 because come 2018, I will have a regular 401k I will set up that will include myself and my employees.

So my question is, is it worth the hassle to set up a solo 401k for only one year? Or should I just put the money toward school loans (at 4.45% variable) or mortgage payments (4.125% Fixed)?

Thanks in advance for any insight!

 

[MPMD]

your question makes it sound like you are early career?

i probably would do it if i were you just b/c it sounds like you're reaching the point where you could come close to maxing out employee/employer.

[KMAC]

Yes I am about 3 years into my career. Went to an expensive school for Dental School and Orthodontic Residency so I finished with around $500K in student debt, all from dental school and residency (we pay for residency as dentists), I had a full ride in undergrad.

Ok so your advice is to set up the Solo 401K so I can put away $40-50K this year ( I have about $120K liquid right now) and then when I dissolve my current corporation and start my new corporation with employees, I would roll the Solo 401K into my new traditional 401K? Does that sound right?

So I end up doing a few hours of paperwork at Vanguard and I have to fill out a few extra tax forms this year (Or my accountant does) in return for saving quite a bit of money on my taxes and putting a good deal of money into a tax protected account?

I wish the WCI would write a tutorial on how to go about doing this like he did for the Back Door Roth IRA.I guess I am just a bit confused about how I go about putting the money in. I just put in $18K as my employee portion and then put 25% of my salary as my employer contribution? And I put these in as a lump sum?

[childay]

How much to contribute with those loan rates would be up for discussion.  You still have 500k in student loans? But I would definitely do something. You would not necessarily need to roll it over into your new plan.  You can keep it open so you can potentially roll over other plans into the solo 401k in future.

[DMFA]

KMAC wrote:

Yes I am about 3 years into my career. Went to an expensive school for Dental School and Orthodontic Residency so I finished with around $500K in student debt, all from dental school and residency (we pay for residency as dentists), I had a full ride in undergrad.

Ok so your advice is to set up the Solo 401K so I can put away $40-50K this year ( I have about $120K liquid right now) and then when I dissolve my current corporation and start my new corporation with employees, I would roll the Solo 401K into my new traditional 401K? Does that sound right?

So I end up doing a few hours of paperwork at Vanguard and I have to fill out a few extra tax forms this year (Or my accountant does) in return for saving quite a bit of money on my taxes and putting a good deal of money into a tax protected account?

I wish the WCI would write a tutorial on how to go about doing this like he did for the Back Door Roth IRA.I guess I am just a bit confused about how I go about putting the money in. I just put in $18K as my employee portion and then put 25% of my salary as my employer contribution? And I put these in as a lump sum?

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You cannot make elective deferrals (employee contributions) for money earned prior to the effective date of a 401(k).  I'm not sure you can make the effective date 1/1/2017 with so few business days left in the year.  Maybe if you walked into a brick-and-mortar like Fidelity or Schwab you *might* be able to get it done.  Here's Schwab's startup instructions and Fidelity's startup instructions.

You might do better with a SEP-IRA for 2017 later to be rolled into a 401(k) in 2018; contributions can be made for 2017 as late as 4/15/2018.  As long as you don't have SEP-IRA money on 12/31, no backdoor Roth conversions will be hindered.

Either walk into a Fido or Schwab office or get on the phone and talk to someone who does this sort of thing every day as their job.  If you think you can't *quite* cram it into the next 3 days, then you might just do a SEP and rollover to 401(k) in 2018.

[L]

You'll have to walk into an office to get it setup in time. I know because I did the same thing today at Fidelity. Had some 1099 income, and started a solo 401k that I can later rollover my traditional IRA money into so I can do a backdoor Roth in the future.

There are two documents that you need that you can get from their website: The application and the adoption agreement. Fill those out in advance, and walk in to the office. Their retirement dept at 800 5445373 was very helpful. If you try mailing it won't happen in time. The actual process took about five minutes at the office. You'll have to report on your taxes later that you funded the account.

[KMAC]

I started with 500K in December of 2014, I am now at 300K in December 2017 (3 years later). We also took my wifes student loans from 220k to 70K. So we paid down our student debt about 350K in the last 3 years but we also paid about 40K in interest each of the past three years. SO a total of 470K put toward student loans in the last three years. Our goal was just to knock out the total of 720K in loans as soon as possible, we are now down to 370K together. But now that I am learning about tax protected retirement accounts, I thought it might make more sense to divert some of our money toward retirement accounts instead of all of it toward loans....

[KMAC]

 

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You might do better with a SEP-IRA for 2017 later to be rolled into a 401(k) in 2018; contributions can be made for 2017 as late as 4/15/2018.  As long as you don’t have SEP-IRA money on 12/31, no backdoor Roth conversions will be hindered.

Either walk into a Fido or Schwab office or get on the phone and talk to someone who does this sort of thing every day as their job.  If you think you can’t *quite* cram it into the next 3 days, then you might just do a SEP and rollover to 401(k) in 2018.

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Thank you for this input DFMA, so basically do nothing for the next few days, once January comes around, fund a SEP-IRA, claim it on my 2017 taxes, and then find sometime before December 31st 2018, I need to set up a 401k that I can roll the SEP-IRA into?

[jfoxcpacfp]

DMFA wrote:

You might do better with a SEP-IRA for 2017 later to be rolled into a 401(k) in 2018; contributions can be made for 2017 as late as 4/15/2018.  As long as you don’t have SEP-IRA money on 12/31, no backdoor Roth conversions will be hindered.

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SEP contributions can be made as late as the due date of your income tax return, including extensions.

As for the backdoor Roth, I believe @spiritrider and I had this discussion on a thread many months ago. If I recall correctly, a SEP contribution for 2017 made in 2018 is treated as though it was in the account as of 12/31/17. I had suggested what you said above and @spiritrider corrected me. So, step 1 of the backdoor Roth can be made in 2017, but the conversion would need to wait until 2018, after the SEP is converted to the solo-k.

[spiritrider]

1. You have until the tax filing deadline (4/17/18) including extensions (10/15/18) to open a SEP IRA account and make contributions for the 2017 tax year. These contributions will be deducted on your 2017 tax return.


2. SEP IRA contributions are reported on Form 5498 in the year they are actually deposited. This reporting is used in determining your "active participant" status for purposes of the traditional IRA deduction income limit.


3. For the purposes of Roth conversions, on Form 8606 it is the actual pre-tax balance on 12/31/17 that will determine any degree of pro rata taxation.


4. Therefore, SEP IRA contributions in 2018 even if for the 2017 tax year will have no affect on 2017 Roth conversions.

Note: Even though you will have employees in 2018, you can still contribute to a one-participant 401k plan for 2018. The IRS allows and the major mainstream providers (except Vanguard) allow you in their adoption agreement to restrict future employees from being eligible participants until they have one year of service.

If you somehow manage to adopt a one-participant 401k plan in the next 2 1/2 days, you will be able to have a one-participant 401k plan for 2017 and 2018. Although, I'm not sure what would happen if the existing business has their own retirement plan.

[boglechu]

How generous do u want to be with employees? If u do sep Ira, I believe u can make it a criteria that participants have to work for 3 years before u qualify. I know a doc who did sep Ira x3 years to max contribution. On forth year, he made 401k.

[KMAC]

spiritrider wrote:

1. You have until the tax filing deadline (4/17/18) including extensions (10/15/18) to open a SEP IRA account and make contributions for the 2017 tax year. These contributions will be deducted on your 2017 tax return.


2. SEP IRA contributions are reported on Form 5498 in the year they are actually deposited. This reporting is used in determining your “active participant” status for purposes of the traditional IRA deduction income limit.


3. For the purposes of Roth conversions, on Form 8606 it is the actual pre-tax balance on 12/31/17 that will determine any degree of pro rata taxation.


4. Therefore, SEP IRA contributions in 2018 even if for the 2017 tax year will have no affect on 2017 Roth conversions.

Note: Even though you will have employees in 2018, you can still contribute to a one-participant 401k plan for 2018. The IRS allows and the major mainstream providers (except Vanguard) allow you in their adoption agreement to restrict future employees from being eligible participants until they have one year of service.

If you somehow manage to adopt a one-participant 401k plan in the next 2 1/2 days, you will be able to have a one-participant 401k plan for 2017 and 2018. Although, I’m not sure what would happen if the existing business has their own retirement plan.

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THANK YOU!

[jfoxcpacfp]

spiritrider wrote:

1. You have until the tax filing deadline (4/17/18) including extensions (10/15/18) to open a SEP IRA account and make contributions for the 2017 tax year. These contributions will be deducted on your 2017 tax return.


2. SEP IRA contributions are reported on Form 5498 in the year they are actually deposited. This reporting is used in determining your “active participant” status for purposes of the traditional IRA deduction income limit.


3. For the purposes of Roth conversions, on Form 8606 it is the actual pre-tax balance on 12/31/17 that will determine any degree of pro rata taxation.


4. Therefore, SEP IRA contributions in 2018 even if for the 2017 tax year will have no affect on 2017 Roth conversions.

Note: Even though you will have employees in 2018, you can still contribute to a one-participant 401k plan for 2018. The IRS allows and the major mainstream providers (except Vanguard) allow you in their adoption agreement to restrict future employees from being eligible participants until they have one year of service.

If you somehow manage to adopt a one-participant 401k plan in the next 2 1/2 days, you will be able to have a one-participant 401k plan for 2017 and 2018. Although, I’m not sure what would happen if the existing business has their own retirement plan.

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Thanks for cleaning that up, @spiritrider - looks like I had it perfectly backward!