Switching to Consulting; Retirement Account Options?

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jimmyrules712
Posts: 640
Joined: Thu Jan 06, 2011 10:36 pm

Switching to Consulting; Retirement Account Options?

Post by jimmyrules712 »

My wife is currently a W2 employee, with a 401k that she's put about $2k into this year so far. In about a month she will probably switch to being a 1099 contractor for the same company and I assume she will lose access to the 401k at that time. I expect her 1099 income to be around $50k annually. From the basic research I've done I believe we can set up a SEP IRA or Solo 401k, correct?

From what I've read the main pros/cons are:
SEP IRA Pros:
Easier to setup & maintain
Lower fees than solo 401k?

Solo 401k Pros
Can contribute more
Can take out loans
Does not impact pro-rata calculations for backdoor Roths
Can contribute as Roth money


If that's all there is then at the moment none of the Solo-401k pros are things we need. However in future we might. Would it be possible to go with an SEP IRA now and convert to a Solo 401k 5 years down the road?
Last edited by jimmyrules712 on Tue Apr 29, 2014 2:05 pm, edited 1 time in total.
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Switching to Consulting; Retirement Account Options?

Post by DSInvestor »

I'd skip the SEP-IRA and use Solo 401k.

On 50K net business income, SEP-IRA would allow around 9K in contribution. Solo 401k would allow around 27K in contributions if under age 50, add $5500 catchup if over age 50. Useful if you want to maximize tax deferred contributions. Also useful if His 401k has high cost investment options - could reduce His 401k contributions by 10K and increase her Solo 401k contributions by 10K to get low cost investment options.

It is possible to start with SEP-IRA and then switch to solo 401k later. Solo 401k wasn't available when I started working for myself so I used SEP-IRA. Fidelity's Self Employed 401k will accept rollover from SEP-IRA. Vanguard's Individual 401k will not accept rollover from SEP-IRA.
Last edited by DSInvestor on Tue Apr 29, 2014 11:46 am, edited 1 time in total.
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snowman
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Re: Switching to Consulting; Retirement Account Options?

Post by snowman »

These days, both SEP-IRA and solo 401k plans are free to set up and free to maintain. There is no advantage of going with SEP-IRA first and than do rollover; in fact, it might be a negative as some solo 401k administrators do not allow incoming rollovers.
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dianna
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Re: Switching to Consulting; Retirement Account Options?

Post by dianna »

+1 for Solo 401k (also referred to as Individual 401k, or I-K).

Consider setting it up through Vanguard; very easy to administrate and manage. Only downside is not being eligible for Admiral shares with lower ER compared to Investor Shares ER, but that's a very minor complaint given the much higher amount one can contribute to an I-K versus a SEP.
Saving$
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Joined: Sat Nov 05, 2011 8:33 pm

Re: Switching to Consulting; Retirement Account Options?

Post by Saving$ »

+1 for the Solo 401k.

However, I'm not sure your "pro's" list is accurate.
1. Not sure what you mean by lower fees for SEP. There were no fee for my Solo 401k, except the fund ERs.
2. Theoretically, a Solo 401k should allow a Roth 401k type contribution, but I'm not aware any such account is actually available anywhere. There was a post here about that not too long ago. However, it is just a matter of time.

Don't underestimate your Solo 401k pro of "does not impact pro rata calculations for backdoor Roths." The way it does not impact that is that if you have any old 401k money you rolled into a traditional IRA, you can roll that over into your Solo 401k, which gets rid of all pretax IRA's, which is how you do the Backdoor Roth. Last I knew Vanguard Solo 401k's do not accept money from Traditional IRA's, so if you want to take advantage of this backdoor Roth pro, go with someone other than Vanguard.

Also Vanguards Solo does not allow Admiral shares, as posed above. You can thus get funds with better ER's in your Solo 401k at other places, like Fidelity.
billfromct
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Joined: Tue Dec 03, 2013 8:05 am

Re: Switching to Consulting; Retirement Account Options?

Post by billfromct »

I helped my daughter, a recent college graduate, set up a Vanguard Solo Roth 401K last year as she is an independent contractor (1099 income statement from the Fed Government at the end of the year) with the GSGA (don't really know what that stands for).

I suggested the Roth Solo 401K because she was in the 10% federal tax bracket and the tax deduction wouldn't help her that much & she would have 40 years to compound this tax free & withdraw tax free.

Vanguard is especially convenient since she has her other investments there (mutual funds, annuity & Roth IRA).

bill
HIinvestor
Posts: 1881
Joined: Tue Apr 08, 2014 3:23 am

Re: Switching to Consulting; Retirement Account Options?

Post by HIinvestor »

Does Fidelity allow you to roll IRAs and other 401Ks into your Solo 401K? Does Schwab?

I'm trying to help someone who is a solo who also has a full-time job where he contributes the maximum to his Roth 401K there. The IRS rules say you can have a SEP IRA or solo 401K as well, but can only contribute the per person max in a year $17,500 (or + $5500 catch up for folks 50 or older). At this point, we have accounts with Schwab and Vanguard so if he can stick with one and then possibly have his solo-401K there as well. He plans to contribute the maximum $5500 to his separate tIRA and hopes to convert it to his existing Roth IRA.

Guess I'll call for more info and talk with the retirement specialists of the respective potential custodians of these accounts (either SEP IRA or solo/individual 401K. Seems best to talk with the folks who are most knowledgeable, as I suspect these rules can change and what each custodian will or will not accept or allow may change over time as well.
SGM
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Re: Switching to Consulting; Retirement Account Options?

Post by SGM »

Vanguard always seems to be a step behind with solo 401k rules. When I was setting up my solo 401k Vanguard required a third party involvement. So I chose another company. I do have some Vanguard ETFs in the account with another company.

Solo 401k does not require the filing of a 5500EZ until assets are greater than $250k. Since I have just about emptied my solo 401k I no longer have to file a 5500EZ until I close the account. I am close to retirement and have rolled over and converted most 401k assets to Roth IRAs. The company I chose does not have a Roth 401k option. Since 5500EZ forms are open to the public, it might be prudent to rollover assets before reaching the $250k limit. Solo 401ks do not offer the same protection against law suits that 401ks do, at least in my state.
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