Opening an individual 401k to complement my SEP IRA

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socal777
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Joined: Wed Mar 21, 2018 4:11 pm

Opening an individual 401k to complement my SEP IRA

Post by socal777 » Thu Mar 29, 2018 9:30 am

I'm a small business owner running a commercial real estate brokerage in Southern California (single member LLC}. I maxed out my SEP contribution for 2017 and am looking for more tax shelter options. Taxable income was $227,000.

I've been reading up on individual 401k's. It seems I may be able to make additional tax deferred contributions for 2017 but am still unclear. My plan would be to set up this new individual 401k with Vanguard. Would appreciate insight from anyone who has been down this road. Thanks.

feehater
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Joined: Fri Jul 14, 2017 10:14 am

Re: Opening an individual 401k to complement my SEP IRA

Post by feehater » Thu Mar 29, 2018 9:49 am

To make any 2017 contributions, your solo 401k would have had to have been established by December 31. You could open one now for your 2018 tax year, but you need to be aware that there are lots of rules about a SEP IRA and a solo 401k existing at the same time. So, until you figure this out, don't contribute to the SEP at all for 2018! Hopefully one of the experts will be along soon to give you all the gory details.

socal777
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Joined: Wed Mar 21, 2018 4:11 pm

Re: Opening an individual 401k to complement my SEP IRA

Post by socal777 » Thu Mar 29, 2018 9:54 am

Thanks for that info. I appreciate it.

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MP123
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Re: Opening an individual 401k to complement my SEP IRA

Post by MP123 » Thu Mar 29, 2018 11:58 am

The solo 401k will allow you to put away a lot more money since it allows you to defer part of your salary as well as making the same employer contribution that you can with the SEP. You can put away an additional $18,500 or $24,500 if over 50 on top of the 25% of wages. As mentioned above it's too late for 2017 but you can open one for 2018. Don't think of it as a complement to your SEP but as a replacement.

You shouldn't make any more contributions to the SEP once you open the 401k. In fact you can roll your SEP into the 401k which will set you up to do "backdoor Roth conversions" assuming you have no other IRAs. That's one of the very handy things about having your own 401k plan.

I know Schwab i401ks allow this sort of incoming rollover but I don't think Vanguard's do so that might be a reason to go with Schwab. Fidelity's might too but again I'm not sure.

socal777
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Joined: Wed Mar 21, 2018 4:11 pm

Re: Opening an individual 401k to complement my SEP IRA

Post by socal777 » Thu Mar 29, 2018 12:27 pm

MP123, thanks for the valuable info. Currently I don't have my LLC set up to pay me a salary to I don't get a W-2. Would I need to set that up to take advantage of your Solo 401K scenario?

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MP123
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Re: Opening an individual 401k to complement my SEP IRA

Post by MP123 » Thu Mar 29, 2018 12:52 pm

socal777 wrote:
Thu Mar 29, 2018 12:27 pm
MP123, thanks for the valuable info. Currently I don't have my LLC set up to pay me a salary to I don't get a W-2. Would I need to set that up to take advantage of your Solo 401K scenario?
No, you don't need to. If you're taxed as a solo proprietor then your "employer" contribution is up to 20% of business income. Which is the same amount that you could have put into the SEP. But then you can put in up to an additional $18,500 ($24,500) of business income too as your "employee" contribution. There is a total overall limit of $55,000 ($61,000 if over 50).

It's sort of like a SEP on steroids...

socal777
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Joined: Wed Mar 21, 2018 4:11 pm

Re: Opening an individual 401k to complement my SEP IRA

Post by socal777 » Thu Mar 29, 2018 1:22 pm

MP123 wrote:
Thu Mar 29, 2018 12:52 pm
socal777 wrote:
Thu Mar 29, 2018 12:27 pm
MP123, thanks for the valuable info. Currently I don't have my LLC set up to pay me a salary to I don't get a W-2. Would I need to set that up to take advantage of your Solo 401K scenario?
No, you don't need to. If you're taxed as a solo proprietor then your "employer" contribution is up to 20% of business income. Which is the same amount that you could have put into the SEP. But then you can put in up to an additional $18,500 ($24,500) of business income too as your "employee" contribution. There is a total overall limit of $55,000 ($61,000 if over 50).

It's sort of like a SEP on steroids...
Very nice. Will be talking to my new CPA and setting up a solo 401k for this year and going forward. Only wish I'd know about this last year. Thanks again for the great information. Much appreciated.

socal777
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Joined: Wed Mar 21, 2018 4:11 pm

Re: Opening an individual 401k to complement my SEP IRA

Post by socal777 » Thu Mar 29, 2018 11:20 pm

I wonder why Vanguard wouldn't allow the SEP rollover into the solo 401k? I'll have to look into that.

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MP123
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Re: Opening an individual 401k to complement my SEP IRA

Post by MP123 » Fri Mar 30, 2018 12:10 pm

socal777 wrote:
Thu Mar 29, 2018 11:20 pm
I wonder why Vanguard wouldn't allow the SEP rollover into the solo 401k? I'll have to look into that.
I'm not sure, it does seem limiting. My understanding is that they also don't let you buy Admiral class shares of their funds or ETFs in their i401k as well but I don't know that for sure. Schwab seemed more flexible when I was shopping for an i401k.

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