Guidance for IRA retirement?

[finalpsychyear]

So my accountant did not seem to know all that much and I actually had more info about sep and 401k iras than it sounded like he did. My question is for those who do sole prop work and get money as 1099's.

1. Is it better to do Sep IRA or individual 401 if you can hit the max number on either?

2. If you plan to have your future spouse in your business and want to also get her the max 401k will it hurt you to have a sep initially and then switch to 401k for everyone provided you are not currently married and are future planning?

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[PsyDr]

1) depends on your corporate structure. Both have similar contribution limits. Solo 401ks tend to have higher management fees. In general, I prefer SEPs.

2) It will not hurt, and switching from SEP to 401k is common. If you are not married, you'd be well served into consulting professionals about putting the business into an FLP or LLC, preferably creating a multiple tiered LLC strategy, and/or creating an self settled irrevocable trust that is administered in a state like NH. If you want children, it would be wise to create a job for teenagers that offers compensation directly to a roth IRA.

 

[finalpsychyear]

1) depends on your corporate structure. Both have similar contribution limits. Solo 401ks tend to have higher management fees. In general, I prefer SEPs.

2) It will not hurt, and switching from SEP to 401k is common. If you are not married, you'd be well served into consulting professionals about putting the business into an FLP or LLC, preferably creating a multiple tiered LLC strategy, and/or creating an self settled irrevocable trust that is administered in a state like NH. If you want children, it would be wise to create a job for teenagers that offers compensation directly to a roth IRA.

I really appreciate your input and I will seek more professional help. In my limited knowledge as a single sole prop these are what i plan to contribute to over the next few years:

1. Maximizing sep IRA
2. maxing out HSA contribution i think 3600
3. maybe a traditional IRA for 5500 but it won't be tax deductible since i am over the threshold
4. defined benefit/defined contribution plan: I looked into this and it doesn't seem like for someone in early 30s it makes a lot of sense since your capped at the amount that can accumulate.

5. the rest of whatever i have left over probably will go into the stock market with a combo of index funds and small percent of bonds etc.
6. 12-18 months of an emergency fund that can cover my current living expenses which essentially would double as my checking account staying always at a certain balance

any major things i am missing out on or does that seem like a fairly reasonable retirement strategy?

 

[PsyDr]

I really appreciate your input and I will seek more professional help. In my limited knowledge as a single sole prop these are what i plan to contribute to over the next few years:

1. Maximizing sep IRA
2. maxing out HSA contribution i think 3600
3. maybe a traditional IRA for 5500 but it won't be tax deductible since i am over the threshold
4. defined benefit/defined contribution plan: I looked into this and it doesn't seem like for someone in early 30s it makes a lot of sense since your capped at the amount that can accumulate.

5. the rest of whatever i have left over probably will go into the stock market with a combo of index funds and small percent of bonds etc.
6. 12-18 months of an emergency fund that can cover my current living expenses which essentially would double as my checking account staying always at a certain balance

any major things i am missing out on or does that seem like a fairly reasonable retirement strategy?

1) Some of this is going to be a learning process. Your initial plan is fine. Once you get some wealth going, more options open up. And you're probably coming into the market at an awesome time, if you don't panic.
2) You might want to educated yourself about:
a."lazy portfolios" especially with vanguard instruments.
b. the difference between defined benefit and defined contribution plans. because people will try to sell you crap
c. learn about life insurance vehicles, BUT DON'T DO IT.
3) No matter how you feel, you should absolutely talk to an attorney about asset protection. Maybe this means you create an LLC, maybe this means you need a prenup, maybe you need to get a loved one's SSN so you can assign someone for payable on death accounts in your early stages of acquisition, maybe it means you need to consider how your house is financed so you don't lose it in a med mal suit. Keep in mind that prenups have an expiration in some states.
4) If you want kids, or your intended is in school, and you live in an applicable state, you could look into 529s.
5) Look into when any children you have can start working, and how you can pay directly into their roths.

 

[Raryn]

I really appreciate your input and I will seek more professional help. In my limited knowledge as a single sole prop these are what i plan to contribute to over the next few years:

1. Maximizing sep IRA
2. maxing out HSA contribution i think 3600
3. maybe a traditional IRA for 5500 but it won't be tax deductible since i am over the threshold
4. defined benefit/defined contribution plan: I looked into this and it doesn't seem like for someone in early 30s it makes a lot of sense since your capped at the amount that can accumulate.

5. the rest of whatever i have left over probably will go into the stock market with a combo of index funds and small percent of bonds etc.
6. 12-18 months of an emergency fund that can cover my current living expenses which essentially would double as my checking account staying always at a certain balance

any major things i am missing out on or does that seem like a fairly reasonable retirement strategy?

You would be better off doing a solo 401k and then a backdoor roth IRA with that non-deductible $5500 contribution.

 

[dpmd]

Also you can find solo 401k that are free of fees making it better then sep because of options like rolling over IRAs into it for starting to do backdoor Roth, Roth 401k option, higher contributions for times you don't hit the max (like later when you divert some of the profit to your spouse). There is one extra form to file yearly when assets in the 401k exceed a certain amount but it is very simple to fill out and submit.

 

[TMP-SMX]

Backdoor Roth is superior to nondeductible traditional IRA but you need to not have any other IRAs that aren't Roth to avoid the pro-rata rule.

 

[finalpsychyear]

Backdoor Roth is superior to nondeductible traditional IRA but you need to not have any other IRAs that aren't Roth to avoid the pro-rata rule.

Can you briefly explain what would happen if i already have a sep ira with let us say for example with 10k in it then i try to do a non deductible 5500 traditional ira to a roth ira conversion. Somehow or another will i end up paying taxes on whatever is also in the sep the following tax year?

 

[Raryn]

Can you briefly explain what would happen if i already have a sep ira with let us say for example with 10k in it then i try to do a non deductible 5500 traditional ira to a roth ira conversion. Somehow or another will i end up paying taxes on whatever is also in the sep the following tax year?

You'll be taxed on a proportion of the conversion due to something called the "pro rata" rule.

Basically, they'll add up all your IRAs and see what % is aftertax and what % is pretax money. Then you'll be taxed on the % that is pretax money - even if all the converted funds were aftertax. You need your traditional IRA balances on 12/31 of the year you do the conversion to be $0 to avoid this.

 

[finalpsychyear]

You'll be taxed on a proportion of the conversion due to something called the "pro rata" rule.

Basically, they'll add up all your IRAs and see what % is aftertax and what % is pretax money. Then you'll be taxed on the % that is pretax money - even if all the converted funds were aftertax. You need your traditional IRA balances on 12/31 of the year you do the conversion to be $0 to avoid this.

So basically doing a backdoor roth IRA with a non deductible traditional of 5500 will require that my sep ira must also be converted at the same time and thus taxes paid on the 10k sep? That stinks!

Just so i am understanding lets say i did a 5k non deductible traditional ira (taxes have been paid on this) so this is after tax money and i already have an existing sep ira with 10k in it ( no taxes paid on it)

Converting the traditional into a backdoor roth would require my sep ira also be converted to escape the pro data rule but that would mean i would then pay tax on that sep ira deduction anyways? If that is correct does the sep and traditional all become one big roth ira fund?

 

[Raryn]

So basically doing a backdoor roth IRA with a non deductible traditional of 5500 will require that my sep ira must also be converted at the same time and thus taxes paid on the 10k sep? That stinks!

Just so i am understanding lets say i did a 5k non deductible traditional ira (taxes have been paid on this) so this is after tax money and i already have an existing sep ira with 10k in it ( no taxes paid on it)

Converting the traditional into a backdoor roth would require my sep ira also be converted to escape the pro data rule but that would mean i would then pay tax on that sep ira deduction anyways? If that is correct does the sep and traditional all become one big roth ira fund?

You either need to convert the SEP IRA (paying taxes on it but making it Roth) or you can roll the SEP IRA into a 401k (solo or employer). The problem is you're running out of time to do so - you'd have to open the solo 401k AND initiate the rollover by 12/31/18, to the point where the SEP IRA balance needs to be $0. Given it's 12/24 and there's enough holidays in the next week, you might not be able to do so.

 

[finalpsychyear]

You either need to convert the SEP IRA (paying taxes on it but making it Roth) or you can roll the SEP IRA into a 401k (solo or employer). The problem is you're running out of time to do so - you'd have to open the solo 401k AND initiate the rollover by 12/31/18, to the point where the SEP IRA balance needs to be $0. Given it's 12/24 and there's enough holidays in the next week, you might not be able to do so.

First thanks so much for the help. I don't think i have enough time and i am still not sure what is best for my situation. Is there any reason someone who is maxing out a sep/401k would still do the 5500 non decutible traditional ira if they were not planning to do the backdoor roth? seems in that case would be better to invest in stock market where you dont have the 59.5 waiting period to pull funds restriction?

Thank you for your help. No more questions from me till after the new year. Happy holidays to you and your family and have an amazing new year to everyone on this forum!

 

[Raryn]

First thanks so much for the help. I don't think i have enough time and i am still not sure what is best for my situation. Is there any reason someone who is maxing out a sep/401k would still do the 5500 non decutible traditional ira if they were not planning to do the backdoor roth?

I don't think so. You might be able to do the nondeductible contribution this year and the conversion next year, but we are getting to a point where I'm not sure of the logistics.

in that case would be better to invest in stock market where you dont have the 59.5 waiting period to pull funds restriction?

Thank you for your help. No more questions from me till after the new year. Happy holidays to you and your family and have an amazing new year to everyone on this forum!

If you're comparing a purely after tax IRA contribution without a Roth conversion to a taxable account, the taxable account wins, yes. But Roth is better than taxable if you can do it.

 

[dpmd]

I don't think so. You might be able to do the nondeductible contribution this year and the conversion next year, but we are getting to a point where I'm not sure of the logistics.




If you're comparing a purely after tax IRA contribution without a Roth conversion to a taxable account, the taxable account wins, yes. But Roth is better than taxable if you can do it.

You can convert the non deductible IRA stuff later. So he could do the nondeductible ira this year (make sure the proper IRS form documents this) and then next year open a solo 401k, move all the sep funds there, and then convert to Roth. This is all in theory right now but I converted nondeductible ira funds this year so if I remember then I will let you all know how taxes go this spring.

 

[finalpsychyear]

You can convert the non deductible IRA stuff later. So he could do the nondeductible ira this year (make sure the proper IRS form documents this) and then next year open a solo 401k, move all the sep funds there, and then convert to Roth. This is all in theory right now but I converted nondeductible ira funds this year so if I remember then I will let you all know how taxes go this spring.

I have until april 15th of 2019 to make the non deductible contribution for 2018?

 

[dpmd]

I have until april 15th of 2019 to make the non deductible contribution for 2018?

Yes