Open BOTH an SEP IRA and a Solo Roth 401K?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
BoglesRazor
Posts: 58
Joined: Fri Jan 03, 2020 11:02 am

Open BOTH an SEP IRA and a Solo Roth 401K?

Post by BoglesRazor » Mon Jun 29, 2020 9:58 pm

Hello All,

I have been researching retirement accounts and comparing SEP IRA to Solo Roth 401K. While there are a lot of articles out there that discuss this, I don't see a discussion that focuses on Solo Roth 401Ks. Right now I am fully employed and I also have a SMLLC on the side. I maxed out my Roth IRA and Roth 401k from my employer so now I want to expand my retirement options to my small business (no traditional retirement accounts aside from my employer match - pennies really). While I project I have 20 years to retire in the traditional path, I actually want to FIRE within the next 10 years. Therefore, I am focusing on aggressive investing and growth, which is why I favor ANY Roth account over traditional. Even if the market doesn't perform well in 10 years, I am fine retiring a little later if needed to recover from the downturn. Thus, my belief is that the best investment accounts are ranked as follows:
  • Solo Roth 401k: $19,500 limit, tax free, self-directed investments

    Roth 401K: $19,500 limit, tax free, employer selected investments

    Roth IRA: $6K limit, tax free, self-directed investments

    529 College Savings Plans - $15K limit for most states (gift tax), tax free (for education purposes), self-directed investments, and a state tax deduction

    SEP IRA: 25% of income or $56K limit, tax deferred, self-directed investments, federal tax deduction

    Solo Traditional 401k - $19,500 limit, tax deferred, self-directed investments, federal tax deduction

    Traditional 401K - $19,500 limit, tax deferred, employer selected investments, federal tax deduction

    Traditional IRA - $6K limit, tax deferred, self-directed investments, federal tax deduction

    **Self-directed meaning I can choose the provider that offers me fund selections for these purposes. Since I plan on investing in index funds, almost any provider will work - I just need to review the ER. In other words, I am not forced to choose funds from only one provider such as a employer sponsored 401K.

    NOTES to consider:

    - My employer sponsored retirement plan (Roth 401K) is expensive because the company I work for is very small. I am 100% total stock market with a 0.7% expense ratio (Vanguard TSX is not available by my provider and this 0.7% is the lowest ER of all the equity options). I am just about maxed out for 2019 in 401K and plan on maxing out for 2020. I was previously financially illiterate and never invested into a 401K until now so I'm trying to catch up now.

    - Since my earned income from my SMLLC (revenue <$10K for 2019, net taxable probably around $5K) is rather small, I would like to know if it makes sense to open BOTH an SEP IRA and a Solo Roth 401k? The Solo Roth 401K makes more sense because I can contribute 100% of my earned income up to $19,500 rather than just 25% of the earned income like an SEP IRA due to my low taxable income, but it has to open the same calendar year to be of any benefit (meaning, I cannot contribute to 2019 anymore). However, the SEP IRA can still contribute for 2019 since the tax deadline is July 15, 2020 and even if the amount is small, I can convert it to a Roth IRA and then transfer to my existing Roth IRA to compound better. In my opinion, Solo 401K is better for smaller revenue than SEP because you can invest all your earned income if it is under $19,500. However, if you earn more than $19,500 in your business, then the SEP would make more sense because you can max out at $57K for 2020. In this case, I would open both an SEP IRA and a Solo401K just so I can allocate to the 2019 tax return and add to my existing Roth IRA. Normally it would not make sense to do both, but I think in this case it does make sense to do both?

    - Furthermore, I can contribute generally up to $15K (gift tax) for a 529 account, but given that I have no children yet, it may not be necessary. However, I view a 529 plan as basically a Roth IRA with a bigger contribution limit and same benefits (as long as the tax free distributions are used for education purposes). This is why I see 529 as more valuable than a taxable account (even if you only pay long term capital gains). Moreover, I'm considering a lump sum investment of $15K for the unborn child so that it can compound for 20 years until the child can go to college. If I never have children, then I can just pay the 10% penalty and withdraw when I retire in a low income tax bracket. Does this make sense or is it too risky? I should note that I don't have much money in my taxable accounts, but I plan on moving some there from sitting in cash (I know, I know...).

    To sum up, this is what I currently hold for investments:

    - Roth 401K (will max out for 2020)
    - Roth IRA (already maxed out for 2020)

    This is what I want to add:

    - SEP IRA (25% of my LLC net taxable) for 2019
    - Solo Roth 401K for 2020 and beyond
    - 529 college savings for 2019 and beyond

    Does this make sense? Is it worth opening an SEP IRA for 2019 now and then going forward to invest in a Solo Roth 401K after closing the SEP IRA? I know $5K profit from my SMLLC doesn't seem much and it would be only 25% of the income that can be contributed to SEP IRA so that's why I'm wondering if this is a case in which opening both an SEP IRA and Solo Roth IRA works.

Post Reply