Traditional Salary + Wife 1099 >200K Income, how to save tax defered

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dingdongditch
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Joined: Wed Mar 15, 2017 7:25 pm

Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby dingdongditch » Wed Mar 15, 2017 8:34 pm

Hello,

First time posting here. I am trying to figure out what tax advantage investment vehicles my wife and I should take advantage of. I make about $135,000 and she makes about $75,000. I am a salaried employee and have a 401k that I max out on ROTH contributions ($18,000) we also have an HSA through my employer that is maxed out. My wife is 1099 and has no 401k.

I researched doing Backdoor ROTH IRAs but we both have existing traditional IRAs. Is this still an option or do we have to convert these to ROTH before being even able to do Backdoor ROTHs? Since my wife can not invest in a traditional or ROTH ira, is there some other tax advantaged investment vehicle we should be taking advantage of?

Thanks

Faith20879
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby Faith20879 » Thu Mar 16, 2017 11:35 am

Hello, welcome to the forum.

For MFJ, the phase out MAGI is $186,000. Your number is roughly (135000+75000-18000)=192000. Can you fit $6000 somewhere between your HSA, FSA, and other deductions?

About the backdoor ROTH, as you said the existing IRA will have to be either converted or rollover into your current 401K plan. Conversion may or may not be advantageous depending on your future earning/tax situation. For option 2, you'll need to check with your 401k administrator to see if they allow it. You'll also need to compare the costs of the fund sin your plans to see if roll-in is cost effective. These are the two options came to mind.

You can also consider the non-deductible tIRA. Do a search of this subject to read about the pros and cons of this route.

Hope this helps!

niceguy7376
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby niceguy7376 » Thu Mar 16, 2017 11:50 am

dingdongditch wrote: I make about $135,000 and she makes about $75,000. I am a salaried employee and have a 401k that I max out on ROTH contributions ($18,000)


You contribute your 401k to roth?
i would prefer to do trad .

as for your spouse, she can do solo 401k (trad) and it lowers the taxable income as well.

DSInvestor
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby DSInvestor » Thu Mar 16, 2017 11:52 am

For 2017, your wife should open a Solo 401k. Fidelity has a great Self Employed 401k that accepts rollovers from IRA and has low cost index funds. If she had established a solo 401k before 12/31/2016, it would have allowed ~32K in contributions on 75K net business income. Solo 401k allows for two types of contributions 1) 18K employee salary deferral (up to 100% of compensation) and 2) employer profit share (~20% of net business income). The sum of employee and employer contributions cannot exceed 53K (2016), 54K (2017). Add 6K catchup if age 50 or over.

She could open a SOlo 401k now and then roll all of her Traditional IRA assets into it. This opens up the backdoor into Roth IRA for her. She contributes to Traditional IRA $5500 for 2016 and another $5500 for 2017, then converts to Roth IRA.

As Faith posted above, consider rolling your Trad IRA assets into your 401k. Hopefully your 401k is low cost and accepts rollovers.
Consider switching to Traditional 401k contributions.

The conversion step of the backdoor into Roth IRA looks at IRA balances as of Dec 31, 2017 for conversions done in calendar 2017. Form 8606 asks for IRA balances in Traditional IRA (includes Rollover IRA), SEP-IRA, SIMPLE-IRA on Dec 31, 2017. As long as you complete the rollover of your Traditional IRA to 401k by DEC 31, 2017, you avoid the prorata rule. This means you do not have to scramble to complete the rollover before APR 18, 2017. Contribute for 2016/2017 now. Convert to Roth when the contributions clear. Rollover all TIRA assets to 401k before DEC 31.

If doing this, make sure you tell your tax software that you contributed to Traditional IRA for 2016 tax year. This will add form 8606 (one for each of you) to track IRA basis. The IRA basis from 2016 (line 14) carries forward to 2017's 8606 (line 2) and allow you to convert the IRA basis to Roth IRA tax free.
Last edited by DSInvestor on Thu Mar 16, 2017 12:01 pm, edited 1 time in total.

HoberMallow
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby HoberMallow » Thu Mar 16, 2017 11:58 am

If you make traditional 401k contributions instead of Roth, and your wife opens a solo 401k and contributes $18k to it, your income will be below the Roth IRA contribution limit ($186k for married filing jointly) and you won't need the backdoor.

Faith20879
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby Faith20879 » Thu Mar 16, 2017 12:01 pm

DSInvestor wrote:For 2017, your wife should open a Solo 401k

That's a good suggestion! I totally missed the bit about wife's 1099 in OP's question.

DSInvestor
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby DSInvestor » Thu Mar 16, 2017 12:03 pm

HoberMallow wrote:If you make traditional 401k contributions instead of Roth, and your wife opens a solo 401k and contributes $18k to it, your income will be below the Roth IRA contribution limit ($186k for married filing jointly) and you won't need the backdoor.


This is true for 2017 tax year. Unfortunately it is too late to establish a Solo 401k for 2016. SEP-IRA is still an option for her to defer some of that 75K self employed income for 2016 tax year. SEP-IRA would allow around 15K (~20% of net business income). This would save a good amount of income taxes (fed and state). Deadline to open SEP-IRA for 2016 is tax filing deadline + extensions.

2Birds1Stone
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Location: New York

Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby 2Birds1Stone » Thu Mar 16, 2017 12:24 pm

Why on gods green earth would you do 401k Roth???

dingdongditch
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby dingdongditch » Thu Mar 16, 2017 5:25 pm

Faith20879 wrote:Hello, welcome to the forum.

For MFJ, the phase out MAGI is $186,000. Your number is roughly (135000+75000-18000)=192000. Can you fit $6000 somewhere between your HSA, FSA, and other deductions?

About the backdoor ROTH, as you said the existing IRA will have to be either converted or rollover into your current 401K plan. Conversion may or may not be advantageous depending on your future earning/tax situation. For option 2, you'll need to check with your 401k administrator to see if they allow it. You'll also need to compare the costs of the fund sin your plans to see if roll-in is cost effective. These are the two options came to mind.

You can also consider the non-deductible tIRA. Do a search of this subject to read about the pros and cons of this route.

Hope this helps!



I neglected to mention that is just our salaries, I sold a bunch of stock that netted more than $20,000 gains on top of that. I used a bunch of that to supplement our income as we paid down student debt to nothing (last year) and still fund my 401k.

dingdongditch
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Joined: Wed Mar 15, 2017 7:25 pm

Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby dingdongditch » Thu Mar 16, 2017 5:28 pm

2Birds1Stone wrote:Why on gods green earth would you do 401k Roth???


Could you elaborate on why I wouldn't want an investment to grow tax free? I understand that this is a highly variable idea that a combination of roth and traditional is best (What I actually already have)

Perhaps fund the first $18,000 as traditional (to reduce total income and put into lower bracket + regain possibly of roth ira?) Perhaps everything >18,000 do a non-deuctible 401k and convert to roth with 401k plan admin?

dingdongditch
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Joined: Wed Mar 15, 2017 7:25 pm

Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby dingdongditch » Thu Mar 16, 2017 5:32 pm

DSInvestor wrote:
HoberMallow wrote:If you make traditional 401k contributions instead of Roth, and your wife opens a solo 401k and contributes $18k to it, your income will be below the Roth IRA contribution limit ($186k for married filing jointly) and you won't need the backdoor.


This is true for 2017 tax year. Unfortunately it is too late to establish a Solo 401k for 2016. SEP-IRA is still an option for her to defer some of that 75K self employed income for 2016 tax year. SEP-IRA would allow around 15K (~20% of net business income). This would save a good amount of income taxes (fed and state). Deadline to open SEP-IRA for 2016 is tax filing deadline + extensions.



I never even knew about solo 401ks until I started doing our taxes and then realized the potential problems we would have for doing a Backdoor roth (the funds we have in tradional). Please be easy guys as we had a rough year putting most of that income to paying off student loans. They are now done so we are very happy.

We filed taxes already, so I would just have to amend the return then if we can find a way to do this? (We used H&R block online to do taxes, can they handle it or should I find a CPA?) (I also have no idea how to find a CPA I can trust.)

livesoft
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby livesoft » Thu Mar 16, 2017 5:49 pm

2016 is long gone, so solo 401(k) and traditional 401(k) for 2017 and beyond.

It seems that you probably should have to pay hardly any income taxes with your income. Here is a thread on how to do that:
viewtopic.php?t=79510

And maybe not for 2016, but for 2017 both of you should be able to contribute to Roth IRAs without having to do backdoor Roth IRA (That is, if you contribute a lot to your traditional 401(k)s).
This signature message sponsored by sscritic: Learn to fish.

dingdongditch
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Joined: Wed Mar 15, 2017 7:25 pm

Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby dingdongditch » Thu Mar 16, 2017 7:38 pm

DSInvestor wrote:For 2017, your wife should open a Solo 401k. Fidelity has a great Self Employed 401k that accepts rollovers from IRA and has low cost index funds. If she had established a solo 401k before 12/31/2016, it would have allowed ~32K in contributions on 75K net business income. Solo 401k allows for two types of contributions 1) 18K employee salary deferral (up to 100% of compensation) and 2) employer profit share (~20% of net business income). The sum of employee and employer contributions cannot exceed 53K (2016), 54K (2017). Add 6K catchup if age 50 or over.

She could open a SOlo 401k now and then roll all of her Traditional IRA assets into it. This opens up the backdoor into Roth IRA for her. She contributes to Traditional IRA $5500 for 2016 and another $5500 for 2017, then converts to Roth IRA.

As Faith posted above, consider rolling your Trad IRA assets into your 401k. Hopefully your 401k is low cost and accepts rollovers.
Consider switching to Traditional 401k contributions.

The conversion step of the backdoor into Roth IRA looks at IRA balances as of Dec 31, 2017 for conversions done in calendar 2017. Form 8606 asks for IRA balances in Traditional IRA (includes Rollover IRA), SEP-IRA, SIMPLE-IRA on Dec 31, 2017. As long as you complete the rollover of your Traditional IRA to 401k by DEC 31, 2017, you avoid the prorata rule. This means you do not have to scramble to complete the rollover before APR 18, 2017. Contribute for 2016/2017 now. Convert to Roth when the contributions clear. Rollover all TIRA assets to 401k before DEC 31.

If doing this, make sure you tell your tax software that you contributed to Traditional IRA for 2016 tax year. This will add form 8606 (one for each of you) to track IRA basis. The IRA basis from 2016 (line 14) carries forward to 2017's 8606 (line 2) and allow you to convert the IRA basis to Roth IRA tax free.



Hi DSInvestor,

This is very helpful. From what I gather sounds like my best plan of action would be to do the following:

1. Open two nondeductible IRAs (One in Wife's name, and one in my Name)
2. Open 2017 Solo 401k account that accepts traditional IRA rollovers in wife's name - use this for wife's retirement account savings
3. Rollover all traditional IRAs into each of our 401k plans (Pending my 401k administrator allows me to- I will call them tomorrow)
4. Once tIRAs roll over into 401k accounts, convert non-deductible IRAs into ROTH IRAs

One question about above, am I limited to 2017 non-deductible IRAs or can we still do 2016 non-deductible IRAs for backdoor ROTH if we complete this before 4/17/2017?


One last question, why is everyone favoring tax-defered over tax-free growth? (I was always under the impression to give the best flexibility for retirement that a mix-between the both would be best or all ROTH such that you avoid taxes all-together)


And thank you guys so much, you have all been very helpful.

Spirit Rider
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby Spirit Rider » Thu Mar 16, 2017 7:48 pm

dingdongditch wrote:We filed taxes already, so I would just have to amend the return then if we can find a way to do this? (We used H&R block online to do taxes, can they handle it or should I find a CPA?) (I also have no idea how to find a CPA I can trust.)

The SEP IRA contribution rules are a little quirky, but you are actually in luck, You can make a 2016 SEP IRA contribution, but you must act quickly. You need to either make the SEP IRA contribution by 04/18/17 or file an extension by 04/18/17. Then you have until 10/16/17 to file an amended return.

From the IRS SEP Plan FAQs - Contributions

When must I deposit the contributions into the SEP-IRAs?

You must deposit contributions for a year by the due date (including extensions) for filing your federal income tax return for the year. If you obtain an extension for filing your tax return, you have until the end of that extension period to deposit the contribution, regardless of when you actually file the return.

If you did not request an extension to file your tax return and did not deposit the SEP plan contributions by the filing due date for that return, you are not allowed to deduct any SEP plan contributions on that year’s return. The contributions may be deducted on the following year’s return.

If you improperly deducted SEP plan contributions on your return, you must file an amended tax return as soon as possible.

Spirit Rider
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby Spirit Rider » Thu Mar 16, 2017 8:27 pm

This is your best course of action is:

  1. Each spouse should make a 2016 contribution to a traditional IRA by 04/18/17 and make a 2017 contribution as soon as possible. They will become non-deductible contributions by claiming no deduction for them on the 2016/17 returns and reporting the non-deductible basis on 2017 Form 8606.
  2. Soon after the non-deductible contributions are made. Convert just the contribution amounts (preferably both 2016 and 2017) to Roth IRA accounts.
  3. Open and fund a SEP IRA for 2016 by 04/18/17 or file an extension and do it later.
  4. Adopt a Solo 401k plan at a custodian that accepts IRA and SEP IRA rollovers. Make sure to set the effect date to 1/1/17 to allow all 2017 self-employment income to be included. .
  5. Rollover all pre-tax SEP IRA and traditional IRA balances including any earnings from the non-deductible contributions to the Solo 401k by 12/31.
  6. Complete 2017 Form 8606 which will consume all non-deductible basis and with non-pre-tax balances, no taxable income.
dingdongditch wrote:One last question, why is everyone favoring tax-deferred over tax-free growth? (I was always under the impression to give the best flexibility for retirement that a mix-between the both would be best or all ROTH such that you avoid taxes all-together)

It is usually best at higher income levels when your marginal tax rates are higher to make tax deferred contributions where possible. You make Roth IRA contributions or backdoor Roth IRA contributions because that is your only option at higher income levels. The tax diversification is a bonus. Most people with be in lower tax brackets during retirement which gives them an opportunity to d Roth conversions at a lower tax rate before age 70 when RMDs start.

2Birds1Stone
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Location: New York

Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby 2Birds1Stone » Fri Mar 17, 2017 7:28 am

dingdongditch wrote:
2Birds1Stone wrote:Why on gods green earth would you do 401k Roth???


Could you elaborate on why I wouldn't want an investment to grow tax free? I understand that this is a highly variable idea that a combination of roth and traditional is best (What I actually already have)

Perhaps fund the first $18,000 as traditional (to reduce total income and put into lower bracket + regain possibly of roth ira?) Perhaps everything >18,000 do a non-deuctible 401k and convert to roth with 401k plan admin?


My apologies.

With a $200k income you stand to gain a HUGE tax advantage by doing traditional 401k. AS a rule of thumb it's best to maximize any tax deferred/advantaged space once you are in the 25%+ tax bracket.

Since you likely do not qualify for Traditional IRA tax deduction, you can use Roth or backdoor Roth contributions for yourself and your spouse.

DSInvestor
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby DSInvestor » Fri Mar 17, 2017 12:10 pm

dingdongditch wrote:

One last question, why is everyone favoring tax-defered over tax-free growth? (I was always under the impression to give the best flexibility for retirement that a mix-between the both would be best or all ROTH such that you avoid taxes all-together)


With Roth 401k, you've paid taxes in advance to state and Fed. If you live in a high tax state like CA and retire to a no tax state like WA/NV, Roth 401k means you will have prepaid CA state income taxes for nothing. While Traditional 401k withdrawals are taxable, the tax rate on some of those withdrawals may be 0% to the extent that they fall in the 0% tax bracket provided by deductions and exemptions.

You can get a mix of Roth and Traditional without giving up the tax deduction by maxing out Traditional 401k contributions and also Roth IRA (via backdoor if necessary). Roth 401k contributions require that you divert money away from Traditional 401k which means you give up the tax deduction (very valuable at your level of income). In your situation, while Roth IRA diverts money from Traditional IRA, it does not give up any deduction because you're not eligible for the Traditional IRA deduction given your coverage by employer plan and high income. If you max out Traditional 401k, Roth IRA, nvest in taxable, you will have lots of tax diversification and will have maximized your tax retirement contribution tax breaks.

Also keep in mind that Roth 401k contributions are irrevocable once made. You cannot change your mind after the contribution. If you make Traditional 401k contributions, you have the option to convert Traditional assets to Roth later either with an in-plan rollover to Roth 401k (or do Roth IRA conversion. Traditional 401k contributions give you more flexibility.

Here's a link to TFB's The Case Against Roth 401k: https://thefinancebuff.com/case-against-roth-401k.html

The tax savings for Traditional 401k gives you more take home pay with which to attack other financial priorities such as student loans, saving for house, making extra principal payments on mortgage, daycare for kids, saving for next car etc. Lots of people focus on tax rate now vs tax rate in retirement but I think there are other things that should be considered.

FWIW, I maxed out Traditional 401k while I was working and in 25-33% Fed 6% state tax brackets. I also maxed out Roth IRA and invested in taxable. Once I stopped working, I lived off the taxable account which is remarkably tax efficient. This allowed me to do Roth conversions every year at a very low or no tax cost. The Roth conversion income is ordinary income and some of it is taxed at 0% due to deductions and exemptions. My taxable account throws off Qualify Dividend Income and LT Capital gains which are stacked on top of ordinary income but are taxed at 0% fed up to the top of the 15% tax bracket. My Roth conversions have no state tax cost as I have moved to a state with no state income tax.

dingdongditch
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Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby dingdongditch » Sun Mar 19, 2017 8:08 pm

Spirit Rider wrote:This is your best course of action is:

  1. Each spouse should make a 2016 contribution to a traditional IRA by 04/18/17 and make a 2017 contribution as soon as possible. They will become non-deductible contributions by claiming no deduction for them on the 2016/17 returns and reporting the non-deductible basis on 2017 Form 8606.
  2. Soon after the non-deductible contributions are made. Convert just the contribution amounts (preferably both 2016 and 2017) to Roth IRA accounts.
  3. Open and fund a SEP IRA for 2016 by 04/18/17 or file an extension and do it later.
  4. Adopt a Solo 401k plan at a custodian that accepts IRA and SEP IRA rollovers. Make sure to set the effect date to 1/1/17 to allow all 2017 self-employment income to be included. .
  5. Rollover all pre-tax SEP IRA and traditional IRA balances including any earnings from the non-deductible contributions to the Solo 401k by 12/31.
  6. Complete 2017 Form 8606 which will consume all non-deductible basis and with non-pre-tax balances, no taxable income.
dingdongditch wrote:One last question, why is everyone favoring tax-deferred over tax-free growth? (I was always under the impression to give the best flexibility for retirement that a mix-between the both would be best or all ROTH such that you avoid taxes all-together)

It is usually best at higher income levels when your marginal tax rates are higher to make tax deferred contributions where possible. You make Roth IRA contributions or backdoor Roth IRA contributions because that is your only option at higher income levels. The tax diversification is a bonus. Most people with be in lower tax brackets during retirement which gives them an opportunity to d Roth conversions at a lower tax rate before age 70 when RMDs start.



Thanks for the further details.

So I will not need to file a 2016 Form 8606 even if myself and my spouse make 2016 nondeductible contributions while we are working on rolling over traditional iras into 401k plans?

Reading through https://thefinancebuff.com/the-backdoor ... ow-to.html looks like I will have to file an amended return to include the Form 8606.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby Spirit Rider » Sun Mar 19, 2017 8:28 pm

You need to file a Form 8606 for each year you make a non-deductible contribution and/or make a Roth conversion.

So yes, you need to file a separate 2016 Form 8606 for the 2016 non-deductible contributions each of you make. It establishes the non-deductible basis you will need for the Roth conversions.

Generally there is no need to file an amended return (1040X) in order to file Form 8606 for prior returns.

dingdongditch
Posts: 16
Joined: Wed Mar 15, 2017 7:25 pm

Re: Traditional Salary + Wife 1099 >200K Income, how to save tax defered

Postby dingdongditch » Sun Mar 19, 2017 8:46 pm

Spirit Rider wrote:You need to file a Form 8606 for each year you make a non-deductible contribution and/or make a Roth conversion.

So yes, you need to file a separate 2016 Form 8606 for the 2016 non-deductible contributions each of you make. It establishes the non-deductible basis you will need for the Roth conversions.

Generally there is no need to file an amended return (1040X) in order to file Form 8606 for prior returns.



Awesome so I just need to file the 2016 Form 8606 myself rather than amending my entire return. Had I completed the nondeductible IRAs before filing I would have punched that into H&R and it would have already been included.


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