Pulling my hair out - SEP IRA vs 401k, W2 + 1099 income

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hopefulbogle
Posts: 4
Joined: Tue Nov 28, 2017 11:42 am

Pulling my hair out - SEP IRA vs 401k, W2 + 1099 income

Post by hopefulbogle » Tue Nov 28, 2017 10:14 pm

Hello all,

My wife recently started a new job where she earns 1099 income. She already works and has W2 income. I also have W2 income. Currently we are in the maximum possible tax bracket. Our retirement accounts are both 100% ROTHs as we did a mega conversion a while back. I also have a profit sharing plan which is not a ROTH. I will post my questions below my personal details:

Myself - 42
The Boss - 42
2 Kids - 9, 7
HCOL area.

Income
Mine - ~700,000 Gross W2 (just recent significant bump up in salary)
Hers = ~50,000 Gross W2; 25,000 1099 Gross

Accounts

Mine - Vanguard - ROTH - 190,000
Vanguard - Taxable - 285,000
Fidelity - Taxable - 160,000
Work profit sharing retirement - 240,000

Hers - Vanguard - ROTH - 210,000

Kid 1 529 - 101,000
Kid 2 529 - 96,000

Other venture capital/real estate investments totalling approx $1 mil.

The information above is probably overkill with regard to my question but if I want to start saving on taxes on her 1099 income, what's the best approach? SEP-IRA? 401k? Would I still be able to do a backdoor conversion with the yearly 5500 amount with her W2 income if we start a SEP-IRA and/or 401k? Would that affect the calculation? Trying to do all of this is tough; I just dropped my financial advisor this year after reading BH.

Thank you for your help.

DSInvestor
Posts: 10876
Joined: Sat Oct 04, 2008 11:42 am

Re: Pulling my hair out - SEP IRA vs 401k, W2 + 1099 income

Post by DSInvestor » Tue Nov 28, 2017 11:18 pm

Given that you need to use the backdoor into Roth IRA, Solo 401(k) would be better than SEP-IRA. SEP-IRA assets are counted by form 8606 to calculate the taxable and non-taxable amounts of Roth conversions and IRA basis will prorated on partial conversions. Solo 401k assets are not counted by form 8606.

You didn't say whether your wife contributes to a retirement plan at her W-2 job. If not, Solo 401k would allow for larger contributions than SEP-IRA. Solo 401k employer profit share contributions are calculated the same way as SEP-IRA contributions. Solo 401k also allows for employee salary deferral contributions of 18K/yr (24K for age 50+). If she does max out a 401k, 403b or other retirement plan at work, that may rule out use of employee salary deferral contributions into solo 401k but the employer profit share contribution would be the same as what SEP-IRA would allow.

I suggest running through form 8606 lines 1-18 to see how the proration of IRA basis works.
IRS form 8606: https://www.irs.gov/pub/irs-pdf/f8606.pdf

Note that form 8606 treats you and your wife separately. If she had SEP-IRA assets, that shows up on her 8606 which impacts her Roth conversions. Your Roth conversions are not affected by her IRA assets.
Wiki

hopefulbogle
Posts: 4
Joined: Tue Nov 28, 2017 11:42 am

Re: Pulling my hair out - SEP IRA vs 401k, W2 + 1099 income

Post by hopefulbogle » Wed Nov 29, 2017 11:16 am

DSInvestor thank you for replying and your input.

My wife does not have any retirement plan through her work as a W2 employee. What I am understanding of your reply, I can start up a solo 401K to maximize her tax savings now. From my understanding, I can also then contribute her 5500 as a backdoor ROTH as a result of her W2 earnings.

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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Pulling my hair out - SEP IRA vs 401k, W2 + 1099 income

Post by FiveK » Thu Nov 30, 2017 12:09 am

hopefulbogle wrote:
Wed Nov 29, 2017 11:16 am
I can also then contribute her 5500 as a backdoor ROTH as a result of her W2 earnings.
Filing MFJ, it's "your" (plural) income that matters, not "his" or "hers" when it comes to IRA contributions. In other words, no problem making IRA contributions.

JDDS
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Re: Pulling my hair out - SEP IRA vs 401k, W2 + 1099 income

Post by JDDS » Thu Nov 30, 2017 12:19 am

Welcome to the forum.

I agree with the above. It is also worth noting that the i401(k) needs to be opened this calendar year for you to be able to make contributions for this year. I do not want to put urgency behind it, but I know the holidays can get busy :)

DSInvestor
Posts: 10876
Joined: Sat Oct 04, 2008 11:42 am

Re: Pulling my hair out - SEP IRA vs 401k, W2 + 1099 income

Post by DSInvestor » Thu Nov 30, 2017 1:22 pm

hopefulbogle wrote:
Wed Nov 29, 2017 11:16 am
DSInvestor thank you for replying and your input.

My wife does not have any retirement plan through her work as a W2 employee. What I am understanding of your reply, I can start up a solo 401K to maximize her tax savings now. From my understanding, I can also then contribute her 5500 as a backdoor ROTH as a result of her W2 earnings.
If she wants to contribute to Solo 401(k) for tax year 2017, she must establish the plan before 12/31/2017. 25K of sole proprietor net income would allow 18K employee salary deferral and about 5K employer profit share for a total of around 22-23K. She would be able to contribute to Traditional IRA as well for the full $5500. Since you're covered by employer plans and have high MAGI, the Trad IRA contributions would be non-deductible (IRA basis) which can be converted to Roth IRA tax free.

I like the Self Employed 401k plan offered by Fidelity. Fidelity has some index funds that are competitive with Vanguard and are lower cost than what is available in Vanguard Individual 401k.
Wiki

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