solo 401k / simple ira / backdoor roth ira options

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cals400ex
Posts: 179
Joined: Wed Aug 01, 2012 8:38 pm

solo 401k / simple ira / backdoor roth ira options

Post by cals400ex » Wed Dec 05, 2018 12:14 pm

Hello,

I currently have a 401k at my W-9 job, and I just received news that they will be changing to a simple IRA. I also have a 1099 job. I generally do a backdoor roth IRA each year and max out my 401K. I have several questions with my options:
1. Setup a solo 401k for my 1099 job (I'm the only worker) and continue doing the backdoor roth IRA. My issue is that my employer automatically contributes 3% of my income (I don't need to contribute anything) every paycheck to my current 401k. Once they do away with the 401K, the employer will be contributing 3% of my pay, every pay period, to the simple IRA. Will this affect what I can do with my back door roth IRA since they contributions from my employer?
2. My 1099 job I only make around $35K a year. I would like to max out a 401K. What are the fees to setup a solo 401k?
3. Is there anything else that I need to take into consideration?

Spirit Rider
Posts: 9168
Joined: Fri Mar 02, 2007 2:39 pm

Re: solo 401k / simple ira / backdoor roth ira options

Post by Spirit Rider » Wed Dec 05, 2018 3:37 pm

1. The pre-tax balances in all traditional, SEP and SIMPLE IRA accounts on 12/31, will subject any Roth conversions during that year to pro-rata taxation. If you get employer contributions it will interfere with the Backdoor Roth.

You might be misunderstanding your employer contributions. A SIMPLE IRA requires either a 2% non-elective employer contribution or a 3% employer match. If you do not contribute at least 3% you will not get any employer match.

2. At most of the mainstream brokerages, there are no fees for one-participant 401k plans. Vanguard charges $20/fund waived if you meet asset requirements.

3. You could still make your non-deductible traditional IRA contributions and just not do the Roth conversions during the first two years. Then after it has been two years since the first contribution to your SIMPLE IRA account, you could resume your Roth conversions. You would just want to make sure you rolled over the balance to the one-participant 401k before 12/31 of ach year.

Optimal but somewhat complicated plan:
  • Make sure you have made the 2018 non-deductible traditional IRA contribution and Roth conversion by 12/31/18.
  • Make the 2019 non-deductible traditional IRA contribution in April 2020, but do not do Roth conversion.
  • In early 2021 after the two year period has elapsed, rollover the pre-tax balances in the traditional and SIMPLE IRA to the one-participant 401k. Make 2020 and 2021 non-deductible traditional IRA contributions and rollover 2019, 2020, and 2021 basis to a Roth IRA.
  • By 12/31 of 2021 and every subsequent year rollover all pre-tax IRA balance to the one-participant 401k. Timing may be such that a small amount will be pro-rata, no much you can do about that.
  • Do mostly tax efficient Backdoor Roths 2022+.

cals400ex
Posts: 179
Joined: Wed Aug 01, 2012 8:38 pm

Re: solo 401k / simple ira / backdoor roth ira options

Post by cals400ex » Thu Dec 06, 2018 12:33 am

Would it be easier if I see if I can opt out of the non-elective employer contributions? I’m not sure if this is legal? But, if I can, I can just open a solo 401k and continue with the backdoor Roth IRA.

On a side note, he said the simple Ira would be a 3% non elective employer contribution, just like it currently is with our 401k...

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Earl Lemongrab
Posts: 5840
Joined: Tue Jun 10, 2014 1:14 am

Re: solo 401k / simple ira / backdoor roth ira options

Post by Earl Lemongrab » Thu Dec 06, 2018 1:44 am

cals400ex wrote:
Thu Dec 06, 2018 12:33 am
Would it be easier if I see if I can opt out of the non-elective employer contributions? I’m not sure if this is legal? But, if I can, I can just open a solo 401k and continue with the backdoor Roth IRA.

On a side note, he said the simple Ira would be a 3% non elective employer contribution, just like it currently is with our 401k...
You're letting the tail wag the dog. Why would you give up free money? The plan above is a good one. Put the non-deductible TIRA contributions into a low-return fund like bonds. Maybe it will be like this year and lose money. When the time comes for conversion, you can roll whatever earnings there are into the solo 401(k) as well if you don't want to pay the tax to convert.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Spirit Rider
Posts: 9168
Joined: Fri Mar 02, 2007 2:39 pm

Re: solo 401k / simple ira / backdoor roth ira options

Post by Spirit Rider » Thu Dec 06, 2018 1:28 pm

cals400ex wrote:
Thu Dec 06, 2018 12:33 am
Would it be easier if I see if I can opt out of the non-elective employer contributions? I’m not sure if this is legal? But, if I can, I can just open a solo 401k and continue with the backdoor Roth IRA.

On a side note, he said the simple Ira would be a 3% non elective employer contribution, just like it currently is with our 401k...
There is no ability to opt out of non-elective contributions. IRS regulations require the employer to make those contributions, even opening a SIMPLE IRA account for you if you refuse and making the contributions on your behalf.

He is either wrong about the percentage or the type of contributions. Unlike a 401k where the 3% safe harbor non-elective employer contribution percentage is a minimum, the SIMPLE IRA non-elective employer contribution percentage must be 2%.

@Earl Lemongrab is correct. It would be crazy to give up free money if it is a 3% match.

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