Employee w/ no company 401k and make too much. Any options?

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whitecliff
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Employee w/ no company 401k and make too much. Any options?

Post by whitecliff » Wed Jan 07, 2015 12:32 pm

I am married and 31 years old and so is my wife. I am an employee with no company 401k options available. I make about 200k gross a year before taxes. My wife is an independent contractor who makes about 60k a year gross before taxes. We are 100% debt free (cars, school loans, etc.) We do not own a home and have one child. I have 100k in an existing solo 401k and approx 6k in a Roth Ira which I did backdoor this year. I was an independent contractor the last few years making about 260k and contributed to it then. My wife has about 10k in a SEP-IRA and ROTH. In another year I will be buying the business I am in now and income will move closer to 400k. I do not want to open any IRA type platforms due to future backdoor roths and avoid the pro rata rule. I have 300k in cash for house, emergencies, cars, etc. I would like to invest some of excess money I have but have no where to do this besides a non-deductible account. Am I missing something? If I am not what are good things to hold in nondeductible account (large question I know)? Thank you.

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dual
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Re: Employee w/ no company 401k and make too much. Any optio

Post by dual » Wed Jan 07, 2015 12:55 pm

I think holding a low turnover index fund like the Vanguard total stock market has some advantages over tax deferred vehicles like IRAs and 401Ks. As always taxes are YMMV but up till now capital gains are taxed at a lower rate than withdrawals from tax deferred accounts. Also recently dividends are taxed preferentially to ordinary income.

You have probably thought of this but you should look into incorporating your business to try to convert some of your current income into equity in the business, which you could then use to defer the present income and pay capital gains rates later. I have read about gambits where people put low price company stock into a Roth IRA and then are able to sell the stock later and take the gains out tax free.

retiredjg
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Re: Employee w/ no company 401k and make too much. Any optio

Post by retiredjg » Wed Jan 07, 2015 1:00 pm

It appears you can contribute $5,500 to tIRA and deduct it because you do not have a plan at work. This might be incorrect if your wife is currently covered by a plan at work.

If she is covered by a plan at work, the amount you can deduct is phased out and them eliminated with a modified AGI of $183k - $193k. So you'll have to figure out your modified AGI to know.

http://www.irs.gov/Retirement-Plans/201 ... an-at-Work

If you do find you can deduct an IRA contribution, that could be rolled into your Solo 401k if the plan allows it. From what we've learned, Vanguard does not allow this, Fido does, and I don't know about anybody else.


Your wife's SEP IRA will interfere with her ability to use the back door. It does not affect yours. She might consider converting it to Roth while you are at this lower income level or opening a Solo 401k instead of using SEP IRA.

You have $300k for emergency, house and car. The only place to hold this is in a taxable account (which I assumed is the same as your "non-deductible account"). Unless your plans are very flexible, this money should be saved, not invested. Suitable vehicles would be money market, CDs, maybe some in short term bonds.

I suppose you could look for more tax-advantaged space in an HSA (if you have a high deductible health care plan) but I don't think that would do much to solve you problem.

chaz
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Re: Employee w/ no company 401k and make too much. Any optio

Post by chaz » Wed Jan 07, 2015 1:34 pm

I agree with Vanguard total stock market fund. Also, buy a nice house.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

whitecliff
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Re: Employee w/ no company 401k and make too much. Any optio

Post by whitecliff » Wed Jan 07, 2015 2:00 pm

retiredjg wrote:It appears you can contribute $5,500 to tIRA and deduct it because you do not have a plan at work. This might be incorrect if your wife is currently covered by a plan at work.
If I did do a tIRA it would hurt me from doing a backdoor in the future because of pro rata rule, correct? She is not covered at her work.

If she is covered by a plan at work, the amount you can deduct is phased out and them eliminated with a modified AGI of $183k - $193k. So you'll have to figure out your modified AGI to know.

http://www.irs.gov/Retirement-Plans/201 ... an-at-Work

If you do find you can deduct an IRA contribution, that could be rolled into your Solo 401k if the plan allows it. From what we've learned, Vanguard does not allow this, Fido does, and I don't know about anybody else.

Although I still have this plan open I am not investing in it because I am not being paid through my business but as an employee.


Your wife's SEP IRA will interfere with her ability to use the back door. It does not affect yours. She might consider converting it to Roth while you are at this lower income level or opening a Solo 401k instead of using SEP IRA.

I will not being doing a backdoor with her.

You have $300k for emergency, house and car. The only place to hold this is in a taxable account (which I assumed is the same as your "non-deductible account"). Unless your plans are very flexible, this money should be saved, not invested. Suitable vehicles would be money market, CDs, maybe some in short term bonds.

This money is being held in two different online savings accounts at 1% interest. Each one is only insured to 250k is the reason I have two. But I have additional money each month I would like to start investing and get a return instead of putting in an online savings account.

I suppose you could look for more tax-advantaged space in an HSA (if you have a high deductible health care plan) but I don't think that would do much to solve you problem.

I also have an HSA of which I max out every year but it is not invested in mutual funds yet, only in a savings account.

retiredjg
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Re: Employee w/ no company 401k and make too much. Any optio

Post by retiredjg » Wed Jan 07, 2015 2:26 pm

whitecliff wrote:If I did do a tIRA it would hurt me from doing a backdoor in the future because of pro rata rule, correct? She is not covered at her work.

It will not hurt you if you roll that tIRA money into your old Solo 401k. You don't have a lot of options to defer taxes. This is a small amount, but better than nothing perhaps. Or maybe deferring taxes on $5,500 is not worth it to you.


Although I still have this plan open I am not investing in it because I am not being paid through my business but as an employee.

It might still accept rollovers from tIRA even if you are not currently investing in it.


But I have additional money each month I would like to start investing and get a return instead of putting in an online savings account.

In that case, a taxable account with a tax-efficient investment is the way to go. How you invest would depend on when you want the money. If this is long term and you want to defer the taxable income, consider I Bonds (information is available in the Wiki)

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englishgirl
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Re: Employee w/ no company 401k and make too much. Any optio

Post by englishgirl » Wed Jan 07, 2015 2:31 pm

whitecliff wrote:
retiredjg wrote:It appears you can contribute $5,500 to tIRA and deduct it because you do not have a plan at work. This might be incorrect if your wife is currently covered by a plan at work.
If I did do a tIRA it would hurt me from doing a backdoor in the future because of pro rata rule, correct? She is not covered at her work.

If she is covered by a plan at work, the amount you can deduct is phased out and them eliminated with a modified AGI of $183k - $193k. So you'll have to figure out your modified AGI to know.

http://www.irs.gov/Retirement-Plans/201 ... an-at-Work

If you do find you can deduct an IRA contribution, that could be rolled into your Solo 401k if the plan allows it. From what we've learned, Vanguard does not allow this, Fido does, and I don't know about anybody else.

Although I still have this plan open I am not investing in it because I am not being paid through my business but as an employee.



There is no time limit on rolling the tIRA account into a 401k if the 401k plan will allow it. Another option is that instead of trying to roll into the current solo 401k, as you say that in a year you will own the business, you will presumably have say in where a 401k for the current business is opened, and hence what that plan allows. You could roll at that time. And you could look into rolling your current solo 401k into there.
Sarah

whitecliff
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Re: Employee w/ no company 401k and make too much. Any optio

Post by whitecliff » Wed Jan 07, 2015 8:13 pm

englishgirl wrote:
whitecliff wrote:
retiredjg wrote:It appears you can contribute $5,500 to tIRA and deduct it because you do not have a plan at work. This might be incorrect if your wife is currently covered by a plan at work.
If I did do a tIRA it would hurt me from doing a backdoor in the future because of pro rata rule, correct? She is not covered at her work.

If she is covered by a plan at work, the amount you can deduct is phased out and them eliminated with a modified AGI of $183k - $193k. So you'll have to figure out your modified AGI to know.

http://www.irs.gov/Retirement-Plans/201 ... an-at-Work

If you do find you can deduct an IRA contribution, that could be rolled into your Solo 401k if the plan allows it. From what we've learned, Vanguard does not allow this, Fido does, and I don't know about anybody else.

Although I still have this plan open I am not investing in it because I am not being paid through my business but as an employee.



There is no time limit on rolling the tIRA account into a 401k if the 401k plan will allow it. Another option is that instead of trying to roll into the current solo 401k, as you say that in a year you will own the business, you will presumably have say in where a 401k for the current business is opened, and hence what that plan allows. You could roll at that time. And you could look into rolling your current solo 401k into there.


I have already contributed 5500 to a tIRA and converted it to do a backdoor Roth. I am not allowed to make another tIRA contribution in a calender year am I? Also what is the benefit of rolling it into the solo 401k?

retiredjg
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Re: Employee w/ no company 401k and make too much. Any optio

Post by retiredjg » Thu Jan 08, 2015 9:05 am

whitecliff wrote:I have already contributed 5500 to a tIRA and converted it to do a backdoor Roth. I am not allowed to make another tIRA contribution in a calender year am I?

An IRA contribution is tied to a year, but you have more than 1 calendar year (15.5 months) in which to make it. For instance, you can contribute to a 2014 IRA during the year of 2014 or up until April 15 of 2015.

If you have already made both your 2014 and 2015 contributions, you are not allowed to make another. If you wanted, you can re-characterize that contribution back to tIRA and deduct it (just like a do-over).


Also what is the benefit of rolling it into the solo 401k?

So it would not interfere with back door contributions to Roth IRA in the future.

whitecliff
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Re: Employee w/ no company 401k and make too much. Any optio

Post by whitecliff » Thu Jan 08, 2015 10:35 am

retiredjg wrote:
whitecliff wrote:I have already contributed 5500 to a tIRA and converted it to do a backdoor Roth. I am not allowed to make another tIRA contribution in a calender year am I?

An IRA contribution is tied to a year, but you have more than 1 calendar year (15.5 months) in which to make it. For instance, you can contribute to a 2014 IRA during the year of 2014 or up until April 15 of 2015.

If you have already made both your 2014 and 2015 contributions, you are not allowed to make another. If you wanted, you can re-characterize that contribution back to tIRA and deduct it (just like a do-over).


Also what is the benefit of rolling it into the solo 401k?

So it would not interfere with back door contributions to Roth IRA in the future.



Ok I am just now grasping this. So am I still able to reverse my Roth conversion back to a tIRA and then roll this into the solo401k? That seems like a lot of paper work and potential for problems. Is this fairly easy to do? Vanguard will allow this?

Also for my wife, can she make a tIRA contribution and just leave it as a tIRA or roll into her SEP and still have this as a deduction? I don't think we will ever do backdoor ROTH with her.
Thank you so much for information

niceguy7376
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Re: Employee w/ no company 401k and make too much. Any optio

Post by niceguy7376 » Thu Jan 08, 2015 11:43 am

OP, if your wife is an independent contractor, what type of retirement plans does she have? Open a solo 401k for her and roll over SEP IRA into it so that she will have clear path of backdoor roth in future.

retiredjg
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Re: Employee w/ no company 401k and make too much. Any optio

Post by retiredjg » Thu Jan 08, 2015 11:53 am

whitecliff wrote:Ok I am just now grasping this. So am I still able to reverse my Roth conversion back to a tIRA and then roll this into the solo401k?

Tax law allows you a "do over" if you later decide you should have contributed to the other type of IRA. I believe this can even be done if you have converted from tIRA to Roth IRA. There is a time limit - it is generous. I didn't read this whole link but it seems to apply - see what you think it means.

http://www.irs.gov/Retirement-Plans/Ret ... onversions

The reason to do this is to reduce your taxable income by $5,500 by making a deductible contribution to tIRA instead of non-deductible. You are allowed to do that (deduct it) because you don't have a plan at work and your spouse is not covered by a plan at work either. In fact your spouse could do it as well it seems.

There would be no need to immediately roll this to the Solo 401k. You can wait until you have a plan at work again at which point you'd probably want to start doing the back door contributions again because your contributions to tIRA would no longer be deductible (once you have a plan at work).


That seems like a lot of paper work and potential for problems. Is this fairly easy to do? Vanguard will allow this?

Vanguard does allow this. People talk as if it is easy to do, but I don't know anything myself. Yes, it seems like a lot of work to lower your taxable income by $5,500 (or $11k) a year for a year or two. I'm not sure it is worth it, but you were looking for places to put money so I mentioned it.

The thing I don't know - let's say you buy this company in December 2015 and set up a 401k plan in December 2015. That might mean that you were "covered by a plan" in 2015 and your tIRA contribution would not be deductible. I suppose at that point you could just call it non-deductible and convert to Roth. Look into this before you set up your 401k plan and before you do a deductible tIRA contribution in the future.

Also for my wife, can she make a tIRA contribution and just leave it as a tIRA or roll into her SEP and still have this as a deduction?

As long as neither of you is "covered by a plan at work", yes. Once one of you has a work plan, your high income will prevent it from being deductible.

retiredjg
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Re: Employee w/ no company 401k and make too much. Any optio

Post by retiredjg » Thu Jan 08, 2015 11:54 am

niceguy7376 wrote:OP, if your wife is an independent contractor, what type of retirement plans does she have? Open a solo 401k for her and roll over SEP IRA into it so that she will have clear path of backdoor roth in future.

This makes sense to me too. First, her contributions to a Solo 401k would lower your taxable income. Second she could use the back door. However, it sounds like she is not interested in that. Maybe she will reconsider.

whitecliff
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Re: Employee w/ no company 401k and make too much. Any optio

Post by whitecliff » Thu Jan 08, 2015 11:58 am

niceguy7376 wrote:OP, if your wife is an independent contractor, what type of retirement plans does she have? Open a solo 401k for her and roll over SEP IRA into it so that she will have clear path of backdoor roth in future.


she doesn't work much and does not make a high wage. Once I buy this business and income goes up she will probably no longer work and become an"employee" of the new business. I will extend the solo 401k to the new business. It will be a 50% acquisition of an existing business where me and the other partner will both have our own business and will acquire 50% stock of the existing business, so "technically" the only employees of my business will be me and my wife.

niceguy7376
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Re: Employee w/ no company 401k and make too much. Any optio

Post by niceguy7376 » Thu Jan 08, 2015 12:06 pm

I proposed it because you said she makes 60k. due to your high income, her 60k only might be equivalent to 30k after taxes (mfj).
If you open solo 401k, she can immediately contribute 17.5K and if you run a payroll of 40 to 44k, as employer, another 10 to 11k goes as employer contributions.
so you already shielded upto 28k without fed and state taxes.
Last edited by niceguy7376 on Fri Jan 09, 2015 9:40 am, edited 1 time in total.

whitecliff
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Re: Employee w/ no company 401k and make too much. Any optio

Post by whitecliff » Thu Jan 08, 2015 2:44 pm

niceguy7376 wrote:I proposed it because you said she makes 60k. due to your high income, her 60k only might be equivalent to 30k after taxes (mfj).
If you open solo 401k, she can immediately contribute 17.5K and if you run a payroll of 440 to 44k, as employer, another 10 to 11k goes as employer contributions.
so you already shielded upto 28k without fed and state taxes.


I know the 17.5 piece is employee deferred compensation, but can you do that regardless of what you actually take as a salary. for example if she only took 20k as a salary and paid income taxes on it can you defer 17.5 upfront and do 0 on the employer side?


if you run a payroll of 440 to 44k,

I don't understand this part, sorry. thanks for all the help

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Re: Employee w/ no company 401k and make too much. Any optio

Post by niceguy7376 » Fri Jan 09, 2015 9:43 am

Corrected the typo of 440 to 40.

Dont try to kill the chicken that lays the golden egg. Take a decent amount of salary based on income brought it.
If she is bringing in 60k, take a salary of 40 to 44k. the remaining will handle the employer taxes and employer contribution leaving a tiny bit as K1 profit.
Out of the salary, contribute 17.5K as employee and get 25% of salary as employer contribution. You need to take more than 17.5k as salary since 17.5K comes out of salary after SS and Medicare taxes.

whitecliff
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Re: Employee w/ no company 401k and make too much. Any optio

Post by whitecliff » Fri Jan 09, 2015 11:46 am

one more question and I will let this thread die. Everyone continues to say you can do a tIRA if you are not "covered by a plan at work". This phrase is confusing to me in the sense that she has a SEP-IRA and a ROTH-IRA she has opened under her business. She has not contributed to this during 2014 for various reasons. She is not as interested in long term investing as I am, I digress. My question is does her SEP and Roth count as a plan covered by her work? We are not eligible to contribute to roth due to income and she has not been taking a salary from her business due to lawyer fees from a long court battle between another business. So again do these other two accounts count as plans "covered by work"? Again she is an independent contractor. Thanks again!!

niceguy7376
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Re: Employee w/ no company 401k and make too much. Any optio

Post by niceguy7376 » Fri Jan 09, 2015 11:50 am

As long as there is a SEP-IRA opened under her business, she is covered under "retirement plan at work". Her contributing or not contributing does not change it.

Roth IRA is not considered as retirement plan at work.

She is an independent contractor at the location where she works. at your home, she is an employer/employee of her company.

retiredjg
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Re: Employee w/ no company 401k and make too much. Any optio

Post by retiredjg » Fri Jan 09, 2015 12:30 pm

I agree that Roth IRA is not involved in any way. That is an individual plan, not a work plan.

I also agree that Her SEP IRA, if it is open for her business, is a plan at work. However, I think I disagree about whether she was "covered". This link reads to me that if she did not contribute for 2014, she was not covered for 2014. See what you think.

http://www.irs.gov/Retirement-Plans/Are ... nt-Plan%3F

Remember that the suggestion to use deductible IRA was based on the statement that neigher of you is covered by a work plan. If she is covered you are covered as well. This does not automatically mean you can't deduct, but you can't deduct in your situation since your income is too high.

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