Real mega Roth conversion (not backdoor Roth) 2010/2011

[qwerty89]

@aneftp , what do you do about
1. FICA taxes on the 1099.
2. malpractice insurance on the 1099 part of your work

How much are those

FYI since you are in CA you also benefit from being able to bypass SALT limit of 10k as an s-corp. You pay a 9.3% elective payment to CA which then gives you a dollar for dollar reimbursement on your state income tax. Because this payment is made by the corporation it is a business expense and can be deducted on your federal taxes. Also as s-corp most accountants say its just fine to pay yourself 50% salary and take the other 50% as distribution. You do not pay FICA on the distribution. This helps decrease medicare taxes (you probably already maxed out SS taxes). Medicare also has the additional tax on income over 200k which started under Obamacare so you can decrease that as well.

Biggest reason to be 1099 is combining a solo 401k with a cash balance plan (and using a mega backdoor roth as well since you can only do 6% 401k match when you combined the two) + SALT bypass + other business related deductions to get your taxable income below the threshold for the 199A Qualified Business Income deduction which is 20%. I think its 380k~ for married filing jointly. Should be ~70k+ deduction. Marginal tax rate (NOT EFFECTIVE) of ~41% at that range (state + fed) means 28k~ back in your pocket for free. Staying below that 380k is key since that is also around the jump from 24% to 32% federal tax bracket. Obviously don't make less just to avoid taxes but if would rather work less then that IMO is the sweet spot as far as actual take home pay (including retirement savings) to work ratio.

SALT limits for W2 earners and the QBI both started in 2017 with Trump. Both made it worse to be W2.

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[onconc]

FYI since you are in CA you also benefit from being able to bypass SALT limit of 10k as an s-corp. You pay a 9.3% elective payment to CA which then gives you a dollar for dollar reimbursement on your state income tax. Because this payment is made by the corporation it is a business expense and can be deducted on your federal taxes. Also as s-corp most accountants say its just fine to pay yourself 50% salary and take the other 50% as distribution. You do not pay FICA on the distribution. This helps decrease medicare taxes (you probably already maxed out SS taxes). Medicare also has the additional tax on income over 200k which started under Obamacare so you can decrease that as well.

Biggest reason to be 1099 is combining a solo 401k with a cash balance plan (and using a mega backdoor roth as well since you can only do 6% 401k match when you combined the two) + SALT bypass + other business related deductions to get your taxable income below the threshold for the 199A Qualified Business Income deduction which is 20%. I think its 380k~ for married filing jointly. Should be ~70k+ deduction. Marginal tax rate (NOT EFFECTIVE) of ~41% at that range (state + fed) means 28k~ back in your pocket for free. Staying below that 380k is key since that is also around the jump from 24% to 32% federal tax bracket. Obviously don't make less just to avoid taxes but if would rather work less then that IMO is the sweet spot as far as actual take home pay (including retirement savings) to work ratio.

SALT limits for W2 earners and the QBI both started in 2017 with Trump. Both made it worse to be W2.

Thanks. But in our case, spouse also works (non physician) and has significant income ; and has no way to convert to a 1099. Spouse is a W2 employee of regular corporation.
Additionally, combined household income is well above 1M. I could ask my hospital to split my compensation between W2 & 1099 (not sure they will agree). But even if they agreed to reduce W2 to 380k, it would be much higher than a 50% split (between W2 and 1099) ; meaning 1099 will be like 65% of my compensation

Any suggestions for our scenario ?

 

[triggermaster]

Thanks. But in our case, spouse also works (non physician) and has significant income ; and has no way to convert to a 1099. Spouse is a W2 employee of regular corporation.
Additionally, combined household income is well above 1M. I could ask my hospital to split my compensation between W2 & 1099 (not sure they will agree). But even if they agreed to reduce W2 to 380k, it would be much higher than a 50% split (between W2 and 1099) ; meaning 1099 will be like 65% of my compensation

Any suggestions for our scenario ?

They can’t pay you 1099 if you are a regular employee. They can’t split between W-2 and 1099 either.

 

[aneftp]

Thanks. But in our case, spouse also works (non physician) and has significant income ; and has no way to convert to a 1099. Spouse is a W2 employee of regular corporation.
Additionally, combined household income is well above 1M. I could ask my hospital to split my compensation between W2 & 1099 (not sure they will agree). But even if they agreed to reduce W2 to 380k, it would be much higher than a 50% split (between W2 and 1099) ; meaning 1099 will be like 65% of my compensation

Any suggestions for our scenario ?

You are kinda of stuck. Having two w2 employees in the household doesn't optimized tax savings especially since both are high earning w2.

This locums doc i met from the northeast left his w2 job because his wife (who is also non medical and has nice paying 400K w2 finance gig with a big company plus bonus. He left his w2 anesthesia job to do pure loucms. He didn't need healthcare benefits since it came from wife's company.

But the key is his kids were 17/19/20. So he's free to travel to do 1099 work.

So depending on your kids ages, it may not be practical to do pure locums work and be away from the family.

It would be hard for me to take a pure w2 hospital job outside of federal/state that offered something (pension/generous retirement plans pretax) or an AMC with 20 weeks off to minimize my taxes.

I know when my friend's anesthesia california practice got taken over by the hospital. The former partners were adamant about not being w2 hospital employees. So they negotiated a 1099 contract paid directly by the hospital to mantain their tax savings. So the hospital bills for them now. They actually make a little more than they did as private practice but with many more tax advantage savings.

So to answer your question, you are stuck if you want to stay a w2 hospital employee. If you love the job or it fits your lifestyle. Stick with it.

 

[triggermaster]

My effective tax rate is 21% as w2 the past 6 years pretty consistent

Now plug that in

I mention back door Roth because people consider that post tax money. 401k/403b Roth option is equally considered post tax money as well. That’s why i mentioned it

Now I routinely put away 50-70k pretax money in any combination of my previous or current solo 401k or sep Ira accounts in addition to Roth 403b post tax account for a total of close to around 100k each year. I am not exclusively post tax Roth. As well as state or county 457b pre tax

I also have maxed out 529 account for the kids and now have 529 accounts for future grand kids who don’t even exists. I had 529 accounts before I was even married.

I am not a novice.

My points of discussion is it’s so contradictory of people to keep pushing for post tax backdoor Roth while bashing post tax Roth 403b option as well. I’m doing a combination of everything

TikTok - Make Your Day

 

[aneftp]

Just updating this thread. I’m finally in the progress of
1. Moving all my money away from my rollover and multiple sep ira into my solo 401k to avoid the pro rata rule

It’s been a pain. Just not worth the head to convert the small non deductible ira I had put in way back in 2006 and 2007 ($8000 cost basis). I’m super paranoid with my taxes as much money know. So I do keep my all my taxes forms the past 30 years. (In PDF formats and not paper anymore)

2. Some brokerages won’t allow you to do in kind security transfers so you are stuck in a cash position waiting for the direct rollover fbo check to re deposit as well. They won’t do a trustee to trustee in kind transfer. So they are like cock roach motels. Easy to put ur money into their brokerage. Hard to transfer out. I’m sure they do that by design

3: I just wanted to put all my money into 2 accounts rather than 15 different retirement accounts
A. Roth
B. Solo 401

Morale of the story. Not worth it if you use a few million in pretax sep and rollover ira especially if forced to to a all cash position for 5-7 business days just to covert a few thousand to Roth via backdoor Roth method

Mow the mega backdoor Roth I’m doing and recommend. That does not depend on the pro rata rules. Solo401.net and other companies allow u to do mega backdoor without exposing to the pro rata rules.

 

[medicine2wallstreet]

You, and this thread, are the two most unhinged things I've ever seen.

As well as your "understanding" of the tax code.

 

[aneftp]

You, and this thread, are the two most unhinged things I've ever seen.

As well as your "understanding" of the tax code.

It’s not unhinged. Most people under 40 never heard of non deductible (non Roth IRA backdoor). That was the only option.

Many high earners had less options where to hide money and the non deductible IRA contributions another option (with no option for back door Roth)

And there were were income limits for regular Roth conversion. So if you made more than 80k/130k back in the 2000s. You could not even do any Roth conversion.

Since 2011. There are no income limits for Roth conversions.

And yes. I understand the tax code.

Tax laws changed. They closed the 412i defined benefits self funded plans. My crna friend is collecting a whopping 25k a month from his self funded 412 since age 57. Image funding it with 3 Million and collecting 300k for life at age 57. 10 years is the break even point and added age 67 it’s all profit for him.

Obama closed the early social security loophole to get full social security benefits as well. (The govt wants you to die ) rather than collecting social security at age 62 (file and suspend) loophole.

Many younger folks don’t understand many of these changes over the years.

 

[Arch Guillotti]

They closed the 412i defined benefits self funded plans.

This is not true. Sorry but you are wrong. And who is "they"?

 

[aneftp]

This is not true. Sorry but you are wrong. And who is "they"?

https://home.treasury.gov/news/press-releases/js1172#:~:text=FROM%2520THE%2520OFFICE%2520OF%2520PUBLIC,underlying%2520economics%2520of%2520the%2520arrangements.%E2%80%9D

It’s true.

I don’t know why you think stuff I say is not true. I meet so many people throughout my life. And make life long friends with me. This crna I met in Memphis is now retired in south Florida. He has that 412 plan fully vested. He’s 62. And been retired for 5 years.

There are tons of tax schemes like this that get shut down over the years

It’s not like I’m making stuff out of the blue. Someone is actually telling me what they do. And than I cross check with my own accountant as well

 

[Arch Guillotti]

https://home.treasury.gov/news/press-releases/js1172#:~:text=FROM%2520THE%2520OFFICE%2520OF%2520PUBLIC,underlying%2520economics%2520of%2520the%2520arrangements.%E2%80%9D

It’s true.

I don’t know why you think stuff I say is not true. I meet so many people throughout my life. And make life long friends with me. This crna I met in Memphis is now retired in south Florida. He has that 412 plan fully vested. He’s 62. And been retired for 5 years.

There are tons of tax schemes like this that get shut down over the years

It’s not like I’m making stuff out of the blue. Someone is actually telling me what they do. And than I cross check with my own accountant as well

Did you even read any of the link? The IRS cracked down on abusive plans. They did not shut them all down. Sorry you are wrong on this one.

 

[aneftp]

Did you even read any of the link? The IRS cracked down on abusive plans. They did not shut them all down. Sorry you are wrong on this one.

I really don’t know why you like to argue with me on taxes and stuff. I know my tax laws I only use accountants to double check my taxes but I know what I’m talking about

As for irs crackdowns. The irs is always changing the rules. That’s just a fact of life. Some people like my crna friend were well within their legal rights using the self funded 412 plans before the irs shut it down. They put 3 million away pretax. That a ton of money to have to put away over the years especially on a crna salary back than. The 412i plans were shut down. So all 412i plans were shut down. I don’t know why you like to say I’m wrong. They are know under 412e plans. So shutting down ALL 412i plans in my world means all of them are shut down. Think about it. Does anyone offer a 412i plan anymore? Nope. That means all 412i plans are shut down. Fairly simple concept. I’m merely responding to your “they did not shut all of them down” quote. They did shut down all 412i plan. Those are facts.
No 412i plans exist these days.

Who knows if the irs will cut down on backdoor Roth in the future. Everyone who talks about back door Roth, at least half of them weren’t around when there was income limits to ANY Roth conversion. The vast majority of people doing backdoor Roth would not qualify for Roth conversions under the pre 2010 tax laws. I don’t know how long the mega backdoor Roth will last either. It’s a fantastic for many docs who have duo w2 regular income plus 1099 significant income.

The point I make is the laws were legal back than. For that 412 plans. Things can change. That’s just a fact of life.

 

[Arch Guillotti]

I really don’t know why you like to argue with me on taxes and stuff. I know my tax laws I only use accountants to double check my taxes but I know what I’m talking about

As for irs crackdowns. The irs is always changing the rules. That’s just a fact of life. Some people like my crna friend were well within their legal rights using the self funded 412 plans before the irs shut it down. They put 3 million away pretax. That a ton of money to have to put away over the years especially on a crna salary back than. The 412i plans were shut down. So all 412i plans were shut down. I don’t know why you like to say I’m wrong. They are know under 412e plans. So shutting down ALL 412i plans in my world means all of them are shut down. Think about it. Does anyone offer a 412i plan anymore? Nope. That means all 412i plans are shut down. Fairly simple concept. I’m merely responding to your “they did not shut all of them down” quote. They did shut down all 412i plan. Those are facts.
No 412i plans exist these days.

Who knows if the irs will cut down on backdoor Roth in the future. Everyone who talks about back door Roth, at least half of them weren’t around when there was income limits to ANY Roth conversion. The vast majority of people doing backdoor Roth would not qualify for Roth conversions under the pre 2010 tax laws. I don’t know how long the mega backdoor Roth will last either. It’s a fantastic for many docs who have duo w2 regular income plus 1099 significant income.

The point I make is the laws were legal back than. For that 412 plans. Things can change. That’s just a fact of life.

Wrong.

 

[aneftp]

Wrong.

Sure. IRS ends all 412i plans. Only 412e plans exists now.

Sorry man. You are 100% wrong on this

Its the equivalent of the irs if they wanted to end all state sponsored 401 (a) plans to force state plans to some other plan.

Simply stated. The 412i plans do not exist anymore.

What part of that do you not understand?

“Nov 2, 2017 — In addition to these unfair results, a more long lasting effect of the IRS initiative was to eliminate the 412(i) plan for the future. ”

Eliminate means ends in case by the way.

IRC 412(i) Abuses: Was the IRS Initiative Overkill?

This article originally appeared in the Fall 2012 issue of Plan Consultant. To view a PDF version, please click here.

www.asppa-net.org

 

[MavFab]

Does anyone work for a staffing firm that handles job placement and billing for them? I will be starting a 1099 gig through a company that takes a percent of my collections in exchange for handling billing and finding locations for me to work. I am curious how much of this is tax deductible. My interpretation of tax law is payments to your biller are tax deductible as well as any marketing expenses. Not sure what amount I can deduct for marketing since this company is essentially handling marketing by finding job sites for me. I appreciate any insight. Fyi I am not anesthesia.

 

[kidthor]

Does anyone work for a staffing firm that handles job placement and billing for them? I will be starting a 1099 gig through a company that takes a percent of my collections in exchange for handling billing and finding locations for me to work. I am curious how much of this is tax deductible. My interpretation of tax law is payments to your biller are tax deductible as well as any marketing expenses. Not sure what amount I can deduct for marketing since this company is essentially handling marketing by finding job sites for me. I appreciate any insight. Fyi I am not anesthesia.

Wouldn’t those just be pure business expenses?

 

[nimbus]

Paying taxes up front for a Roth conversion is a hard pill to swallow. Are Roth accounts tax free for your heirs too?

Edit: looks like answer is yes.

Opinion | The Retirement Maneuver More People Should Be Making

Roth conversion is often a smart choice. Don’t let the tax bill scare you.

www.nytimes.com

 

[MavFab]

Wouldn’t those just be pure business expenses?

That is my thought as well and would significantly decrease my tax burden but I'm wondering if things change since it is through a staffing company.

 

[aneftp]

USAP allows in-plan after tax roth conversions
Team health also allows it
Does Envison or Napa allow it also?

Fidelity self employed 401k doesn’t allow it. (In plan after tax roth conversion)

 

[finalpsychyear]

Paying taxes up front for a Roth conversion is a hard pill to swallow. Are Roth accounts tax free for your heirs too?

Edit: looks like answer is yes.

Opinion | The Retirement Maneuver More People Should Be Making

Roth conversion is often a smart choice. Don’t let the tax bill scare you.

www.nytimes.com

WIth step up in basis on a taxable account then capital gains tax isnt it like the first 120-130k if no other income with standard deduction is tax free plus it keeps rising yearly. Also inherited roth ur heirs have to take out after 10 years due to secure act.

 

[aneftp]

WIth step up in basis on a taxable account then capital gains tax isnt it like the first 120-130k if no other income with standard deduction is tax free plus it keeps rising yearly. Also inherited roth ur heirs have to take out after 10 years due to secure ac

I think around 45k as single person in terms of income no taxes on capital gains.
90k as married couple. It changes with inflation.

But just putting it out there. Say u have zero taxable income and get a 2 million buyout of ur business. Do you pay any taxes on that 2 million dollar long term gains??

Here's how much you can make in 2025 and still pay 0% capital gains

The 0% capital gains bracket could offer tax planning opportunities, experts say. Here are the taxable income limits for 2025.

www.cnbc.com

 

[finalpsychyear]

I think around 45k as single person in terms of income no taxes on capital gains.
90k as married couple. It changes with inflation.

But just putting it out there. Say u have zero taxable income and get a 2 million buyout of ur business. Do you pay any taxes on that 2 million dollar long term gains??

Here's how much you can make in 2025 and still pay 0% capital gains

The 0% capital gains bracket could offer tax planning opportunities, experts say. Here are the taxable income limits for 2025.

www.cnbc.com

Its 125k with standard deduction for married couple filing jointky and it goes up a few k every few years. With heirs inheriting it at a new step up they can likely take out 200k plus no tax or more. Some roth never hurts but thr mega back door is a pass for me.

 

[aneftp]

It’s 125k with standard deduction for married couple filing jointky and it goes up a few k every few years. With heirs inheriting it at a new step up they can likely take out 200k plus no tax or more. Some roth never hurts but thr mega back door is a pass for me.

I would have done the mega Roth conversion in 2010 if I had the money to pay for the taxes. Because that same sep ira is worth 1.8 million now. It was 500k. I was looking at another 150k tax bill to convert. Housing crash. Me losing a crap load on homes (250k lost) when others walked away. New kid on the way.

Just different times and era of thinking. Most people were excited there was no income tax limit on Roth for the first time.

The length of time for the roth to grow is so important as well.

 

[finalpsychyear]

I would have done the mega Roth conversion in 2010 if I had the money to pay for the taxes. Because that same sep ira is worth 1.8 million now. It was 500k. I was looking at another 150k tax bill to convert. Housing crash. Me losing a crap load on homes (250k lost) when others walked away. New kid on the way.

Just different times and era of thinking. Most people were excited there was no income tax limit on Roth for the first time.

The length of time for the roth to grow is so important as well.

Im all about the taxable as i plan to fire sub 50. 401k/roth are fine and all but those likely will be passed on.

 

[aneftp]

Im all about the taxable as i plan to fire sub 50. 401k/roth are fine and all but those likely will be passed on.

That’s impressive if you can be financially independent before age 50.

I’m looking closer to age 55 to feel comfortable

I can probably cut back to 0.8 fte plus not do locums work right now. To to be financially independent I gotta hit close to 10 million as well

But I know very few docs (outside of women docs) who quit early ( before age 50) (but those women docs usually have a husband work a second income)

 

[finalpsychyear]

That’s impressive if you can be financially independent before age 50.

I’m looking closer to age 55 to feel comfortable

I can probably cut back to 0.8 fte plus not do locums work right now. To to be financially independent I gotta hit close to 10 million as well

But I know very few docs (outside of women docs) who quit early ( before age 50) (but those women docs usually have a husband work a second income)

Lets just call it 50 yo. If you counted all investments 401k/457/403/roth/hsa and somehow managed to invest 250k for 20 years at 7% you actually get there the magical 10m liquid investment. VTI has 9% over the last 24 years so actually 200k for 20 years at 9% also worked.

The impressive part i assume is knowing to invest from the get go and hitting 250k like clockwork while avoiding stupid financial mistakes.

Im not advocating not living your life but I think if side work is involved so you can still spend well during the 20 years its doable for more people than they think. Just not everyone cares/wants/needs that 10m but imo thats like a magical milestone.. drop the mic walk away achievement.

 

[aneftp]

Lets just call it 50 yo. If you counted all investments 401k/457/403/roth/hsa and somehow managed to invest 250k for 20 years at 7% you actually get there the magical 10m liquid investment. VTI has 9% over the last 24 years so actually 200k for 20 years at 9% also worked.

The impressive part i assume is knowing to invest from the get go and hitting 250k like clockwork while avoiding stupid financial mistakes.

Im not advocating not living your life but I think if side work is involved so you can still spend well during the 20 years its doable for more people than they think. Just not everyone cares/wants/needs that 10m but imo thats like a magical milestone.. drop the mic walk away achievement.

It’s a moving target. 10 years ago that magic number was 6 million plus the house for me.

I also feel I need to have a 300-400k war chest for each kid outside of my net worth for grad school. That’s another 800k post tax to raise. And I’m only for 200k per kid so far in their 529 (i prepaid Florida college already many years ago ) but Florida prepaid is so cheap anyways the state keep giving me money from my original prepays.

Healthcare on the exchanges for a 50/55 year old for 2 people is running around 20k a year plus high deductible of 10k plus.

Kids a lot of unknown future costs.

The real issue you mention about the last 20 years of returns (2004-2024) is you forgot to factor in 2000/2001. A 10k total stock market investment in 2000 would be worth 10k in 2010. 0% in returns due to the 40% pull back from the market.

So some of that is timing

“For the period of December 31, 1999 through December 31, 2009, the S&P 500 index had an annualized simple price return of -2.72%. When dividends are factored in, the results do not get much better as annualized total return for the S&P 500 index (with dividends reinvested back into the index) over the same timeframe was -0.95%.”

10 years of zero returns. That’s a lost decade.

Tons of parents got screwed if they had their kids in 529 plans and off to college between 2008-2011. Those 529 plans went no where as well.

 

[finalpsychyear]

It’s a moving target. 10 years ago that magic number was 6 million plus the house for me.

I also feel I need to have a 300-400k war chest for each kid outside of my net worth for grad school. That’s another 800k post tax to raise. And I’m only for 200k per kid so far in their 529 (i prepaid Florida college already many years ago ) but Florida prepaid is so cheap anyways the state keep giving me money from my original prepays.

Healthcare on the exchanges for a 50/55 year old for 2 people is running around 20k a year plus high deductible of 10k plus.

Kids a lot of unknown future costs.

The real issue you mention about the last 20 years of returns (2004-2024) is you forgot to factor in 2000/2001. A 10k total stock market investment in 2000 would be worth 10k in 2010. 0% in returns due to the 40% pull back from the market.

So some of that is timing

“For the period of December 31, 1999 through December 31, 2009, the S&P 500 index had an annualized simple price return of -2.72%. When dividends are factored in, the results do not get much better as annualized total return for the S&P 500 index (with dividends reinvested back into the index) over the same timeframe was -0.95%.”

10 years of zero returns. That’s a lost decade.

Tons of parents got screwed if they had their kids in 529 plans and off to college between 2008-2011. Those 529 plans went no where as well.

its a moving target but that is why you need to hit it asap so then you can move with the target. Of course you have to largely invest in safe index funds but extra side work allows you to maybe you can go big into single stocks like tesla/nvidia/mag7 or crypto. Large wealth was usually always made by big bets then some will diversify to de-risk.

 

[maxxor]

USAP allows in-plan after tax roth conversions
Team health also allows it
Does Envison or Napa allow it also?

Fidelity self employed 401k doesn’t allow it. (In plan after tax roth conversion)

None of the free solo401 companies offer this.

I use employee fiduciary and got them from boglehead forums. Emparion also supposedly offers.