Sep IRA question

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meda23
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Joined: Sun Oct 21, 2018 5:53 pm

Sep IRA question

Post by meda23 » Sun Apr 14, 2019 7:39 pm

Hello All,
Here is the back story. I am an anesthesiologist. I work a main job as a W2 employee. I have a 401k that I give the max contribution to. I have an tIRA with about 90k in it that was a rollover from a 401k from a previous employer. My income is too high for any additional contributions to a Roth or tIRA. I considered trying a backdoor Roth however my current employer will not accept the tIRA to be rolled into my current 401k. I am soon going to start a second position outside of my W2 as an 1099 independent contractor. I am expecting at least 50-60k in additional income. I recently learned about SEP IRAs. So here are my questions:
1. For my circumstances would contributing to a SEP make sense for retirement planning and lowering my taxable income?
2. Are there income limits for a SEP IRA like there are for a tIRA and ROTH?
3. Would this 1099 position allow me to open a SEP IRA and contribute tax deferred? Would my ability to contribute stop if I left that 1099 position?
4. Can I rollover my tIRA into the SEP IRA? Would this count as a contribution to the SEP?
5. What would be the max contribution? Would it be based on my overall income or just income on my 1099?

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Wiggums
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Re: Sep IRA question

Post by Wiggums » Sun Apr 14, 2019 7:43 pm

The SEP IRA contribution limit increased by $1,000 in 2019, from $55,000 to $56,000. SEP IRAs are traditional retirement accounts for small business owners and employees, including self-employed freelancers. That’s you!

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southerndoc
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Re: Sep IRA question

Post by southerndoc » Sun Apr 14, 2019 8:59 pm

Maybe someone can definitively answer this, but here's what I believe to be correct:

You can (and should) open up a Self-Employed 401(k) with Fidelity (Self-Employed is just Fidelity's term they use instead of Solo). You won't be able to contribute employee contributions/salary deferrals as you are already doing this at your place of work as a W-2. However, you can contribute employer contributions to the Solo 401(k) just as you can with a SEP. The same limits apply as the SEP.

Why do I suggest you open with Fidelity? They allow you to roll a SEP-IRA into their Self-Employed 401(k). However, I'm not sure if they allow a traditional IRA to be rolled over. You'll need to ask them. A Solo 401(k) will eliminate the prorata rules of a backdoor Roth if you can roll over your tIRA into their Solo 401(k).

You won't be able to contribute to either a SEP or a Solo 401(k) if you do not have 1099 income (or at least a Schedule C being filed for your own business).

The maximum contribution is 25% of net earnings, which comes out to 20% for self-employed/sole proprietors when they deduct self-employment tax and their SEP contributions. Income greater than $280,000 cannot be considered according to the IRS. For 2019, you can contribute up to $56,000 if your income allows. Your contributions to your workplace 401(k) don't count toward your employer contributions toward a SEP-IRA/Solo 401(k).

EDIT: It appears Fidelity offers tIRA rollovers into their Self-Employed 401(k). https://thefinancebuff.com/rollover-ira ... -401k.html Note what the article mentions: you can only withdraw for qualified hardships, termination of employment (i.e., you stop working for yourself), etc.

This is still likely a better option than a SEP. Double check to make sure you can open one while covered under your employer's 401(k), but I'm 99% certain you can do this.
Last edited by southerndoc on Sun Apr 14, 2019 9:13 pm, edited 1 time in total.

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southerndoc
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Re: Sep IRA question

Post by southerndoc » Sun Apr 14, 2019 9:06 pm

A calculator is available that will factor in your workplace income and 401(k) contributions: https://obliviousinvestor.com/solo-401k ... alculator/

Spirit Rider
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Re: Sep IRA question

Post by Spirit Rider » Sun Apr 14, 2019 10:25 pm

meda23 wrote:
Sun Apr 14, 2019 7:39 pm
1. For my circumstances would contributing to a SEP make sense for retirement planning and lowering my taxable income?
No. As has already been pointed out. You want to adopt a one-participant 401k that accept IRA rollover contributions (not Vanguard).
2. Are there income limits for a SEP IRA like there are for a tIRA and ROTH?
There are no income limits for either a SEP IRA or one-participant 401k.
3. Would this 1099 position allow me to open a SEP IRA and contribute tax deferred? Would my ability to contribute stop if I left that 1099 position?
All that is is necessary to adopt an employer retirement plan is self-employed earned income from a trade or business in the current or any prior year.
4. Can I rollover my tIRA into the SEP IRA? Would this count as a contribution to the SEP?
Yes, you can rollover a traditional IRA to a SEP IRA. Rollover contributions are never included in direct contribution limits to any account type. More importantly, rolling over to a SEP IRA solves nothing. Roth conversions are subject to pro-rata taxation of all pre-tax IRA balances in all traditional, SEP and SIMPLE IRA accounts. A Backdoor Roth with little to no taxable income liability can only be performed if all pre-tax IRA balances are rolled over to a 401k, 403b or 457b plan
5. What would be the max contribution? Would it be based on my overall income or just income on my 1099?
Since you have already maximized your employee elective contribution limit through your main W-2 employer's plan. The maximum employer contribution would be the same for both a SEP IRA and one-participant 401k. The maximum employer contribution is 20% of your self-employed earned income (business profit - 1/2 SE tax).

All roads lead to a one-participant 401k, not a SEP IRA.

Topic Author
meda23
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Re: Sep IRA question

Post by meda23 » Sun Apr 14, 2019 10:48 pm

Wow! Guys thanks for the advice. I wasn’t even thinking of a solo 401k. It definitely sounds like the better option.

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southerndoc
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Re: Sep IRA question

Post by southerndoc » Sun Apr 14, 2019 10:56 pm

meda23 wrote:
Sun Apr 14, 2019 10:48 pm
Wow! Guys thanks for the advice. I wasn’t even thinking of a solo 401k. It definitely sounds like the better option.
Fidelity has been top notch since I opened my account with them last year. Two major drawbacks for Fidelity: no Roth option (won't apply to you since you max out employee deferrals at your W2 job) and inability to make online contributions. I don't mind mailing a check. I mail checks to the IRS all the time instead of doing online direct debit/direct pay. The reason I hate lack of online contributions with Fidelity is it takes 2-3 days for USPS to deliver mail, 1-2 days for Fidelity to process it, and then they hold the funds for 2-4 days before I can invest.

Another point about Solo 401(k) vs SEP: You can still establish a SEP up until tomorrow and fund it for 2018 up until your tax deadline (including extensions). A Solo 401(k) must be established in the year it is funded -- so you would have to open prior to 12/31/2018 to fund for 2018. Another difference is that a business ID (Employer Identification Number) is required to open a Solo 401(k), but isn't required for a SEP. You should also have a separate business checking account for the Solo 401(k) since all contributions are made by the employer (your company). Can't remember where I read the separate checking account detail, but it's generally a good principle to separate your business and personal expenditures.

Spirit Rider
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Re: Sep IRA question

Post by Spirit Rider » Sun Apr 14, 2019 11:32 pm

southerndoc wrote:
Sun Apr 14, 2019 10:56 pm
The reason I hate lack of online contributions with Fidelity is it takes 2-3 days for USPS to deliver mail, 1-2 days for Fidelity to process it, and then they hold the funds for 2-4 days before I can invest.
There is a workaround. Open a cash management account in the same name as the SE401k employer at Fidelity. If you do an EFT pull from another financial institution by 4:00pm ET at Fidelity it will be in your CMA the next morning. Then you can do a phone contribution to the SE401k.

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southerndoc
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Re: Sep IRA question

Post by southerndoc » Sun Apr 14, 2019 11:45 pm

Spirit Rider wrote:
Sun Apr 14, 2019 11:32 pm
southerndoc wrote:
Sun Apr 14, 2019 10:56 pm
The reason I hate lack of online contributions with Fidelity is it takes 2-3 days for USPS to deliver mail, 1-2 days for Fidelity to process it, and then they hold the funds for 2-4 days before I can invest.
There is a workaround. Open a cash management account in the same name as the SE401k employer at Fidelity. If you do an EFT pull from another financial institution by 4:00pm ET at Fidelity it will be in your CMA the next morning. Then you can do a phone contribution to the SE401k.
I've heard about this, but so far haven't done it.

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