SEP-IRA only or rollover to a Roth-IRA?

[mauricekenter]

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Quick question. I just graduated from residency and I will have 3 sources of income this year from working and I want to save for retirement before paying off loans, etc. I am planning on opening a SEP-IRA and contributing the max I can, but I am not sure if I should convert this to a Roth-IRA, or whether I should take the tax deduction and just keep it in the SEP-IRA since I will be in a higher tax bracket. My new company will pay for a 401k starting next year, but not this year. I will likely have around $300,000 total in gross income with about $180,000 coming from an independent contractor job. Any advice/help would be appreciated!

 

[ThoracicGuy]

Quick question. I just graduated from residency and I will have 3 sources of income this year from working and I want to save for retirement before paying off loans, etc. I am planning on opening a SEP-IRA and contributing the max I can, but I am not sure if I should convert this to a Roth-IRA, or whether I should take the tax deduction and just keep it in the SEP-IRA since I will be in a higher tax bracket. My new company will pay for a 401k starting next year, but not this year. I will likely have around $300,000 total in gross income with about $180,000 coming from an independent contractor job. Any advice/help would be appreciated!

Do a individual 401k with your 1099 income. A SEP IRA is counted along with traditional IRA money and could be a barrier to a backdoor Roth.

You can also contribute more to the 401k compared to the SEP.

 

[krl7044]

Quick question. I just graduated from residency and I will have 3 sources of income this year from working and I want to save for retirement before paying off loans, etc. I am planning on opening a SEP-IRA and contributing the max I can, but I am not sure if I should convert this to a Roth-IRA, or whether I should take the tax deduction and just keep it in the SEP-IRA since I will be in a higher tax bracket. My new company will pay for a 401k starting next year, but not this year. I will likely have around $300,000 total in gross income with about $180,000 coming from an independent contractor job. Any advice/help would be appreciated!

You can open a solo 401k and contribute $52k into it with this much SE income. If this is just for one year, solo 401k is much better than a SEP where you can only put 20% of SE income.

Your contribution will be $17,500 + 20% of your profits (if 1099), so with $180k you will just about max it out.

This way you don't have to worry about converting the SEP. You can keep the money inside the solo 401k, and still you can do backdoor Roth contributions. If you have any self-employment income going forward you can utilize the solo 401k.

Chances are, unless your new 401k at work is cross-tested, you won't be able to max it out at $52k, so you will need to consider after-tax investment options, and given your tax bracket, individual municipal bonds (which are tax free) start looking pretty good (and even better so if you are in a high tax state).

If going forward you find that your self-employment income is still high, and if you are at least 35, then a 'solo' Cash Balance plan might make sense. These plans usually are recommended for those over 45, but there are circumstances when they make sense for solo business owners/contractors.
http://litovskymanagement.com/2013/04/retirement-plans-business
http://litovskymanagement.com/2013/04/retirement-plans-business