SEP IRA vs Backdoor Roth

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Topic Author
nutcracker
Posts: 4
Joined: Sat Oct 26, 2019 12:33 pm

SEP IRA vs Backdoor Roth

Post by nutcracker » Sat Oct 26, 2019 12:51 pm

Hi all,
I am a newbie to investing and still learning about the various tax deferred/free retirement options. I am a full time hospital employed physician. I have a 401K through my employer which I max out. I will start doing locum tenens soon. I would be making about 100K through the locum tenens (as a 1099 employee). I don't have any other IRAs at present other than the full time employer 401K. I understand that at the year end you should not have an money left in any of your IRAs if you do the backdoor Roth. But since the backdoor Roth is allowing for only 6K vs the SEP IRA allowing pretax contributions of 25% of income (about 25K for me) Im confused as to which one to go for? During my research I couldn't find a clear answer. TIA

mhalley
Posts: 7646
Joined: Tue Nov 20, 2007 6:02 am

Re: SEP IRA vs Backdoor Roth

Post by mhalley » Sat Oct 26, 2019 1:35 pm

Are you talking about a sep ira for the 1099 gig? Why not do a solo 401k, thus preserving the ability to do backdoor Roth.
https://obliviousinvestor.com/sep-vs-si ... solo-401k/

Topic Author
nutcracker
Posts: 4
Joined: Sat Oct 26, 2019 12:33 pm

Re: SEP IRA vs Backdoor Roth

Post by nutcracker » Sat Oct 26, 2019 1:57 pm

Thanks for your reply. I have contributed 19 K through my employer 401K. So will I be able to contribute again through a solo 401K since I have reached the annual contribution limit through my employer? Also I didn't know that you could do the backdoor Roth and have a solo 401K at the same time. Thanks again

lakpr
Posts: 3046
Joined: Fri Mar 18, 2011 9:59 am

Re: SEP IRA vs Backdoor Roth

Post by lakpr » Sat Oct 26, 2019 2:03 pm

nutcracker wrote:
Sat Oct 26, 2019 1:57 pm
Thanks for your reply. I have contributed 19 K through my employer 401K. So will I be able to contribute again through a solo 401K since I have reached the annual contribution limit through my employer? Also I didn't know that you could do the backdoor Roth and have a solo 401K at the same time. Thanks again
No the total employEE contributions across all plans is $19k. But what the solo 401k does is to afford you an opportunity to contribute a maximum of 20% * (business profits - employer half of self employment taxes), or $56k, whichever is the lower figure. As an EMPLOYER. Not as an EMPLOYEE.

Solo 401k has the advantage of not interfering with the backdoor Roth unlike SEP IRA

Edited - 25% to 20%; see Spirit Rider's correction below.
Last edited by lakpr on Sat Oct 26, 2019 4:54 pm, edited 3 times in total.

Topic Author
nutcracker
Posts: 4
Joined: Sat Oct 26, 2019 12:33 pm

Re: SEP IRA vs Backdoor Roth

Post by nutcracker » Sat Oct 26, 2019 2:11 pm

Got it! So I should be able to do a solo 401K with contributions only as an employer (since I have maxed out the employee part with my main job 401K) and also do a back door Roth as well ! Thanks!!

lakpr
Posts: 3046
Joined: Fri Mar 18, 2011 9:59 am

Re: SEP IRA vs Backdoor Roth

Post by lakpr » Sat Oct 26, 2019 2:20 pm

You are welcome. If you haven't opened any Solo 401k yet, I suggest you open it at E*trade because, in case in the future you want to contribute EMPLOYEE contributions to the same plan, you can do so either as a traditional or Roth contributions. It also allows in-plan Roth conversions of the employee contributions, should such a need arise for year end tax planning.

- Vanguard allows both traditional and Roth contributions, but no Roth conversions within the plan, nor allows rollover of any external IRA funds
- Fidelity does not even allow employee Roth contributions

E*Trade is the only Solo 401k provider known so far that would allow either traditional or Roth employee contributions, also allows certain contributions to be converted to Roth, and allows external assets to be rolled into this plan. You may not need all these features straight out of the bat, but nice to have options isn't it?

EMPLOYER contributions in any plan, of course, have to be traditional pretax contributions by law

Topic Author
nutcracker
Posts: 4
Joined: Sat Oct 26, 2019 12:33 pm

Re: SEP IRA vs Backdoor Roth

Post by nutcracker » Sat Oct 26, 2019 2:29 pm

I haven't opened it yet. I will most likely be hospital employed for my entire career for my full time job due to the nature of my specialty and may never contribute the employee part for my solo 401 K but you never know! definitely good to have options! Thanks again for all your advice!

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

Re: SEP IRA vs Backdoor Roth

Post by Spirit Rider » Sat Oct 26, 2019 4:32 pm

The maximum employer contribution is 25% of compensation, but the employer contribution itself is not compensation. For a self-employed individual, the maximum employer contribution is 20% of self-employment earned income (business profit - SE tax). On $100K of self-employment earned income, your maximum employer contribution will be $20K.

fyre4ce
Posts: 351
Joined: Sun Aug 06, 2017 11:29 am

Re: SEP IRA vs Backdoor Roth

Post by fyre4ce » Sat Oct 26, 2019 10:16 pm

E*Trade's Solo 401k is indeed very good. They also recently added in a bunch of low cost Schwab mutual funds.

If you would like more opportunities to save, you could consider getting a Solo 401k that supports the Mega Backdoor Roth (MBR). If you make $100k in your locums job (after subtracting 1/2 SE taxes) you can put away $20k pre-tax, but with the Mega Backdoor Roth you could put away another $36k as Roth. There are some Solo 401k's that purport to support the Mega Backdoor Roth (MySolo401k.com, DiscountSolo401k.com), although there was concern raised in a recent thread about whether these firms actually offer proper compliance with IRS rules for the Mega Backdoor Roth. There are also setup and annual fees involved, around $600 to set up and $200/year. Nonetheless, if I were in your position and wanted to save an extra $36k in tax-advantaged accounts I would explore the MBR.

Cyanide123
Posts: 195
Joined: Sun May 05, 2019 9:14 am

Re: SEP IRA vs Backdoor Roth

Post by Cyanide123 » Sun Oct 27, 2019 3:23 am

nutcracker wrote:
Sat Oct 26, 2019 1:57 pm
Thanks for your reply. I have contributed 19 K through my employer 401K. So will I be able to contribute again through a solo 401K since I have reached the annual contribution limit through my employer? Also I didn't know that you could do the backdoor Roth and have a solo 401K at the same time. Thanks again
You can still make the employer contribution to the solo 401k.

And agreed, etrade is one of the best options.

Another good option is TD ameritrade

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