Independent contractor retirement fund advice

[pootcarr]

What type of retirement fund is best to open as a independnet contractor?

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[mauricekenter]

In my opinion a solo-401k. While it is a tad bit harder and more paperwork and eventually another tax form once your savings gets above 250k or somewhere around there, the huge advantages are.

1) Can still do backdoor Roth IRA (can't with SEP-IRA)

2) Depening on how much you make you can contribute a larger portion and have a better shot as maxing out than with other savings vehicles.

 

[The White Coat Investor]

It brings tears to my eyes to see such a perfect response given as the first response on this thread.

Don't forget your personal and spousal backdoor Roth IRA. Probably ought to use an HDHP with an HSA as well. If you really want to put away a ton pre-tax, you might also consider a personal defined benefit/cash balance plan in addition to the individual 401(k). All in, you might be able to reduce your taxable income by up to $100K a year or so, depending on your age. Be aware the fees on a personal DBP are much higher than for a solo 401(k). Schwab charges $1200 to start and $1200 a year for theirs. May not be worth it to you unless your contributions are quite high, which they won't be if you're really young.

 

[emergentmd]

You can sock away 53k in a SEP Each yr.

 

[pootcarr]

I was looking at a 401 k solo or a sep. If I do a 401 k with vangaurd (who i ready opened a Roth IRA during residency with) can I easily transfer funds to the roth from the 401k? Should I move ALL the money to the roth a few days after contributing to the solo 401k?

 

[GeneralVeers]

I like SEP-IRA because it's easy, and the contribution level is high. Combined with a HSA, I can put away $56K per year completely tax free. Everything else goes into my investment account.

 

[em1234]

the contribution maximum (53k/y) is the same regardless of which type of account you have (sep or solo 401k). It's way easier to set up a SEP, but it does mess up your backdoor Roth conversions. An added benefit for the Solo 401k is if you are looking to cut back on your hours, you can still max the Solo 401k on less income compared to a SEP.

 

[The White Coat Investor]

I was looking at a 401 k solo or a sep. If I do a 401 k with vangaurd (who i ready opened a Roth IRA during residency with) can I easily transfer funds to the roth from the 401k? Should I move ALL the money to the roth a few days after contributing to the solo 401k?

Probably not. Why would you?

 

[The White Coat Investor]

I like SEP-IRA because it's easy, and the contribution level is high. Combined with a HSA, I can put away $56K per year completely tax free. Everything else goes into my investment account.

Technically tax-deferred, not free. If you had chosen an individual 401(k) instead of a SEP, you could do $61,500 instead of $56 by adding the backdoor Roth you've excluded yourself from by having a SEP.

 

[emergentmd]

I backed door my SEP into a roth and have a Mid 6 figure Roth account. I did it, not sure why you can't. Its a pretax account, I paid the tax to convert. Did it 5 yrs ago, no issues with IRS.

 

[GeneralVeers]

Stupid question but why would you want to "back door" SEP-IRA into a Roth? What are the advantages? I always thought that you should defer the hit on taxes as long as possible, because your tax rate will be higher now than during retirement, plus that amount you are paying taxes on isn't accruing interest over 30 years.

 

[coachB]

Stupid question but why would you want to "back door" SEP-IRA into a Roth? What are the advantages? I always thought that you should defer the hit on taxes as long as possible, because your tax rate will be higher now than during retirement, plus that amount you are paying taxes on isn't accruing interest over 30 years.

Thinking that your tax rate will be higher now is a pretty big assumption. Looking at how marginal tax rates have fluctuated over the years and the ongoing political interests in changing things, who really knows? Top marginal rates are actually pretty low historically right now. The other issue that sometimes gets neglected in making decisions regarding tax-deferred accounts is the difference between the top marginal rate on income vs capital gains. If you put investments in long term vehicles without a lot of dividend income, depending on your time frame, it might make more sense to not use a tax-deferred account. The calculations depend on a lot of assumptions that are hard to know for sure, but certainly something to consider. Particularly for those in the highest marginal brackets, tax-deferral is not always the best option.

 

[GeneralVeers]

Thinking that your tax rate will be higher now is a pretty big assumption. Looking at how marginal tax rates have fluctuated over the years and the ongoing political interests in changing things, who really knows? Top marginal rates are actually pretty low historically right now. The other issue that sometimes gets neglected in making decisions regarding tax-deferred accounts is the difference between the top marginal rate on income vs capital gains. If you put investments in long term vehicles without a lot of dividend income, depending on your time frame, it might make more sense to not use a tax-deferred account. The calculations depend on a lot of assumptions that are hard to know for sure, but certainly something to consider. Particularly for those in the highest marginal brackets, tax-deferral is not always the best option.

I'm not seeing a clear benefit to the Roth conversion. At best you are saying "we can't predict what will happen". On that point I certainly agree.

 

[The White Coat Investor]

Nothing wrong with converting your SEP every year if your goal is a higher ratio of tax-free to tax-deferred money. For most docs in their peak earnings years, that's not the right move (better to have more tax-deferred) but you may be different.

 

[pootcarr]

Ok guys, several questions. I set up my (i)401k through vangaurd. I also have a Roth IRA with them from when I was a resident, an HSA through blue cross, and about 10k in a 401k with tiaacreff from when i was a resident

1. How exactly do I backdoor convert money from my i401k unto my roth ira? How much can I do per year?
2. my goal this year is to put 53 k into the i401k, 3.5 k into the HSA, and however much into the Roth IRA through backdoor conversion. I am 30 years old, does this sound like a good plan for the next several years? What if I want to retire by 50, how do I get my money out?
3. What do I do with the money sitting in the 401k from my prior employer?

Thanks!

 

[Direct Laryngoscopy]

http://whitecoatinvestor.com/the-mega-backdoor-roth-ira/

I'm changing jobs, in which I'll be 1099 and still debating whether to go the 410K vs SEP route. 401 seems like it's more beneficial with the backdoor Roth, but a little more work. Plus once my loans are paid off I will probably do the defined benefit plan.

I'm an anesthesiologist but I read the EM forum cause you guys are cool and post interesting cases and topics like us anesthesiologists


Sent from my iPhone using SDN mobile app

 

[pootcarr]

I am looking at this portion of the post

"Variation # 2 The High Income Independent Contractor"

It talks about recommending a 401k in the first sentence, but then goes on to talk about Roth to Roth conversions in the step by step. what am i missing?

 

[The White Coat Investor]

Ok guys, several questions. I set up my (i)401k through vangaurd. I also have a Roth IRA with them from when I was a resident, an HSA through blue cross, and about 10k in a 401k with tiaacreff from when i was a resident

1. How exactly do I backdoor convert money from my i401k unto my roth ira? How much can I do per year?
2. my goal this year is to put 53 k into the i401k, 3.5 k into the HSA, and however much into the Roth IRA through backdoor conversion. I am 30 years old, does this sound like a good plan for the next several years? What if I want to retire by 50, how do I get my money out?
3. What do I do with the money sitting in the 401k from my prior employer?

Thanks!

1. I haven't done it previously, but the way you do it from a Vanguard traditional IRA is simply to transfer it from there to the Roth. It might require more paperwork. Why not call Vanguard and ask? Or just try it online. Heck, I'll try it myself.....okay, just tried it. They won't let you do it online. You'll have to call and probably fill out some paperwork manually. Make sure you actually want to do this. I wouldn't.
2. Remember that a backdoor Roth IRA gets contributed into a traditional IRA, then is converted to a Roth IRA. That's $5500 for you if under 50, $6500 if over 50. You can also do it for your spouse. Here's how to get to your money before 59 1/2: http://whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/ Your plan sounds fine at first glance, but I wouldn't call it a complete plan. Certainly saving $60K a year toward retirement from the beginning of your career will make you a lot better off than many docs, but without knowing anything about your goals, it's hard to say if your plan is good. You could run the numbers like this though: Let's say you are 30 and want to retire at 50 and want to save $60K a year toward that goal and expect a 5% after-inflation return. How much will you have at 50? $2.1M. What kind of income can you take from that each year? Something like $84K a year in today's dollars. If that's enough, then your plan is good. If not, better plan to save more or work longer.
3. Why not roll it into your i401(k)? If you're going to convert the i401(k), why not convert the employer's 401(k) too?

 

[The White Coat Investor]

http://whitecoatinvestor.com/the-mega-backdoor-roth-ira/

I'm changing jobs, in which I'll be 1099 and still debating whether to go the 410K vs SEP route. 401 seems like it's more beneficial with the backdoor Roth, but a little more work. Plus once my loans are paid off I will probably do the defined benefit plan.

I'm an anesthesiologist but I read the EM forum cause you guys are cool and post interesting cases and topics like us anesthesiologists


Sent from my iPhone using SDN mobile app

Well, we are pretty cool around here and for your flattery I'll just point out that it sounds like you get the SEP vs solo 401(k) decision. SEP is simpler, 401(k) allows you to contribute more with less income and doesn't screw up the backdoor Roth pro-rata calculation.

 

[The White Coat Investor]

I am looking at this portion of the post

"Variation # 2 The High Income Independent Contractor"

It talks about recommending a 401k in the first sentence, but then goes on to talk about Roth to Roth conversions in the step by step. what am i missing?

A tax-deferred 401(k) is my usual recommendation for attendings. But if for some reason you wanted tons of Roth money instead of tax-deferred money, you could use a SEP-IRA and just convert it every year so you could still do backdoor Roth IRAs.

 

[pootcarr]

1. I haven't done it previously, but the way you do it from a Vanguard traditional IRA is simply to transfer it from there to the Roth. It might require more paperwork. Why not call Vanguard and ask? Or just try it online. Heck, I'll try it myself.....okay, just tried it. They won't let you do it online. You'll have to call and probably fill out some paperwork manually. Make sure you actually want to do this. I wouldn't.
2. Remember that a backdoor Roth IRA gets contributed into a traditional IRA, then is converted to a Roth IRA. That's $5500 for you if under 50, $6500 if over 50. You can also do it for your spouse. Here's how to get to your money before 59 1/2: http://whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/ Your plan sounds fine at first glance, but I wouldn't call it a complete plan. Certainly saving $60K a year toward retirement from the beginning of your career will make you a lot better off than many docs, but without knowing anything about your goals, it's hard to say if your plan is good. You could run the numbers like this though: Let's say you are 30 and want to retire at 50 and want to save $60K a year toward that goal and expect a 5% after-inflation return. How much will you have at 50? $2.1M. What kind of income can you take from that each year? Something like $84K a year in today's dollars. If that's enough, then your plan is good. If not, better plan to save more or work longer.
3. Why not roll it into your i401(k)? If you're going to convert the i401(k), why not convert the employer's 401(k) too?

Oh. I understand now. So I contribute 53 k into the i401k per year. then i open a traditional roth with vanguard and contribute 5,500 into it and then convert it into the roth ira after a day or so? I had asked vanguard about converting the employers 401k into my new i401k but he seemed to think I couldn't do that. maybe I misunderstood.

 

[dchristismi]

FWIW, I set up an ind 401K with Vanguard and it was pretty easy. A little bit of paperwork, but they will walk you through everything. They also then create a "small business" account for you, and you have to have a different login to deal with that asset (ie move money in,) but it does show up on the "personal investors" login.

And yes, you dump 53K in the i401 (as long as you make enough to max it out), and contribute to a traditional IRA, then turn around and dump it in your Roth a few days later.

I will say that there is a beautiful explanation at WCI's blog, and even a particular link that gives a detailed (with screenshots) description of how to correctly get it into Turbotax, if you do your own taxes.

 

[The White Coat Investor]

Oh. I understand now. So I contribute 53 k into the i401k per year. then i open a traditional roth with vanguard and contribute 5,500 into it and then convert it into the roth ira after a day or so? I had asked vanguard about converting the employers 401k into my new i401k but he seemed to think I couldn't do that. maybe I misunderstood.

That's a Vanguard rule, not an IRS one. There are other places you can open an individual 401(k) if you need to roll something over into it. You can get a custom designed plan at Vanguard that can do an IRA rollover.