Roth Ira and ROth Solo 401k

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anaelmasri
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Roth Ira and ROth Solo 401k

Post by anaelmasri »

Hello there --I am looking into investment for growth and retirment. I am debt free but in the low income bracket.

I am considering first to open a ROTH IRA with a brokerage to setup some investments. and then I debated if I wanted to do trading in stocks or etfs or index funds with a brokerage account as opposed to ROTH SOLO 401K

Is there a difference between ROTH 401K vs ROTH SOLO 401K? reason I ask also is because I am technically self employed cause I work in the entertainment industry, so jobs are with different clients as per project that comes up, payed mostly in w2 format - some very few jobs I do are 1099, would I qualify for either?

i feel having a roth solo 401k vs a brokerage account makes more tax sense and better in the long run. why would i chose a brokerage account for investing as opposed to roth solo 401k? i dont make a lot of income so the limit investment doesnt hurt me.

If you are considering to open both a traditional IRA and Roth IRA - what type of investment which you put in each retirement account to gain the most tax benefit. would it be better to after maxing a roth IRA to open a traditional IRA as an alternative investment account as opposed to a brokerage/?

stocks and etfs in Roth while Mutual funds and bonds in traditional? or vice versa?

thoughts?

would love to know your thoughts, thank youI
Last edited by anaelmasri on Mon Sep 14, 2020 2:02 am, edited 3 times in total.
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David Jay
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Re: Roth Ira and ROth Solo 401k

Post by David Jay »

Some simple definitions:

1. IRA stands for individual retirement account. An individual owns and controls this account.

2. 401K accounts are set up and controlled by a company.

Any work you do for which you are paid a W-2 is money that does not qualify for a Solo 401K. A Solo 401K has higher costs and compliance issues (paperwork, because you are the "company), so if you intend to contribute less than $6000 per year it will be much easier for you to use a Roth IRA. A Roth 401K is not appropriate for a sole proprietor in almost all cases.

Start with a Roth IRA. If you "fill up" ($6000/yr) the Roth IRA and are looking for more space for savings, you can look into a Solo 401K and contribute from the "1099" money.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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anaelmasri
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Re: Roth Ira and ROth Solo 401k

Post by anaelmasri »

David Jay wrote: Sun Sep 13, 2020 7:28 pm Some simple definitions:

1. IRA stands for individual retirement account. An individual owns and controls this account.

2. 401K accounts are set up and controlled by a company.

Any work you do for which you are paid a W-2 is money that does not qualify for a Solo 401K. A Solo 401K has higher costs and compliance issues (paperwork, because you are the "company), so if you intend to contribute less than $6000 per year it will be much easier for you to use a Roth IRA. A Roth 401K is not appropriate for a sole proprietor in almost all cases.

Start with a Roth IRA. If you "fill up" ($6000/yr) the Roth IRA and are looking for more space for savings, you can look into a Solo 401K and contribute from the "1099" money.
what is the disadvantage you see in a roth solo 401k? I also read that it can be a company or if you are self employed - even if you drive uber on the side as a form of independent contractor - is that false?

I am considering if that doesnt work out then do 2 roth iras vs roth ira and brokerage due to tax worry. would that be a smarter way to go even though the limit for both would be 6K a year? I mean I dont imagine making enough money to do more but will keep DRIP moving it along.
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Re: Roth Ira and ROth Solo 401k

Post by mcraepat9 »

anaelmasri wrote: Sun Sep 13, 2020 7:48 pm
David Jay wrote: Sun Sep 13, 2020 7:28 pm Some simple definitions:

1. IRA stands for individual retirement account. An individual owns and controls this account.

2. 401K accounts are set up and controlled by a company.

Any work you do for which you are paid a W-2 is money that does not qualify for a Solo 401K. A Solo 401K has higher costs and compliance issues (paperwork, because you are the "company), so if you intend to contribute less than $6000 per year it will be much easier for you to use a Roth IRA. A Roth 401K is not appropriate for a sole proprietor in almost all cases.

Start with a Roth IRA. If you "fill up" ($6000/yr) the Roth IRA and are looking for more space for savings, you can look into a Solo 401K and contribute from the "1099" money.
what is the disadvantage you see in a roth solo 401k? Nothing, David Jay is just saying that if you aren't even filling up your Roth IRA (a similarly tax free arrangement with far less paperwork/red tape), then it makes sense to go down that path first.I also read that it can be a company or if you are self employed - even if you drive uber on the side as a form of independent contractor - is that false? Yes true, if you are paid via 1099-MISC, then yes you are self employed and that compensation can be used as the basis for contributing to a Solo 401(k), subject to the various dollar/compensation limits.

I am considering if that doesnt work out then do 2 roth iras vs roth ira and brokerage due to tax worry. would that be a smarter way to go even though the limit for both would be 6K a year? I don't understand - you can have as many IRAs as you want, but the contribution cap in any one year is the same. I mean I dont imagine making enough money to do more but will keep DRIP moving it along.
Tell us roughly how much you earn from W-2, 1099-MISC, what retirement plan options you have at your W-2 job (do you participate?), what existing IRAs you have today, and your fed/state marginal tax rates, and then we can give more intelligent and well thought out suggestions for you.
Amateur investors are not cool-headed logicians.
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David Jay
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Re: Roth Ira and ROth Solo 401k

Post by David Jay »

anaelmasri wrote: Sun Sep 13, 2020 7:48 pmwhat is the disadvantage you see in a roth solo 401k? I also read that it can be a company or if you are self employed - even if you drive uber on the side as a form of independent contractor - is that false?

As I said above, only 1099 income can be used to qualify for Solo 401K and only 50% of your net self employment profit (revenue minus expenses). You said you did not have much 1099 income, that is the reason I recommended Roth IRA. More information on Solo 401K in the Wiki at this link, especially note the reporting requirements to IRS and DOL in the "caveats" section: https://www.bogleheads.org/wiki/Solo_401(k)_plan

I am considering if that doesn't work out then do 2 roth iras vs roth ira and brokerage due to tax worry. would that be a smarter way to go even though the limit for both would be 6K a year? I mean I dont imagine making enough money to do more but will keep DRIP moving it along.

One cannot contribute more than $6000 per year to their Roth IRAs regardless of the number of accounts. Opening (2) Roth IRA accounts does not allow one to contribute more than $6,000 per year. If you are married, you can contribute to a spouse's Roth IRA based on your income (this would get you to $12,000 per year).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
anaelmasri
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Re: Roth Ira and ROth Solo 401k

Post by anaelmasri »

mcraepat9 wrote: Sun Sep 13, 2020 8:00 pm
anaelmasri wrote: Sun Sep 13, 2020 7:48 pm
David Jay wrote: Sun Sep 13, 2020 7:28 pm Some simple definitions:

1. IRA stands for individual retirement account. An individual owns and controls this account.

2. 401K accounts are set up and controlled by a company.

Any work you do for which you are paid a W-2 is money that does not qualify for a Solo 401K. A Solo 401K has higher costs and compliance issues (paperwork, because you are the "company), so if you intend to contribute less than $6000 per year it will be much easier for you to use a Roth IRA. A Roth 401K is not appropriate for a sole proprietor in almost all cases.

Start with a Roth IRA. If you "fill up" ($6000/yr) the Roth IRA and are looking for more space for savings, you can look into a Solo 401K and contribute from the "1099" money.
what is the disadvantage you see in a roth solo 401k? Nothing, David Jay is just saying that if you aren't even filling up your Roth IRA (a similarly tax free arrangement with far less paperwork/red tape), then it makes sense to go down that path first.I also read that it can be a company or if you are self employed - even if you drive uber on the side as a form of independent contractor - is that false? Yes true, if you are paid via 1099-MISC, then yes you are self employed and that compensation can be used as the basis for contributing to a Solo 401(k), subject to the various dollar/compensation limits.

I am considering if that doesnt work out then do 2 roth iras vs roth ira and brokerage due to tax worry. would that be a smarter way to go even though the limit for both would be 6K a year? I don't understand - you can have as many IRAs as you want, but the contribution cap in any one year is the same. I mean I dont imagine making enough money to do more but will keep DRIP moving it along.
Tell us roughly how much you earn from W-2, 1099-MISC, what retirement plan options you have at your W-2 job (do you participate?), what existing IRAs you have today, and your fed/state marginal tax rates, and then we can give more intelligent and well thought out suggestions for you.
I would say my income is roughly 70 percent w2 and 30 percent 1099. I dont have a retirement plan because its not with one employer - I work on various productions and when the show is over the work is over. I have no existing IRAs, my income is in the 20 to 40K bracket. some of the portfolio I have in mind is more based in ETfs and some high dividend stocks for long term I.e. VOO, VTI, VXUS, BND and maybe VYM - possible individual stocks aapl, T, JNJ, KO.
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David Jay
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Re: Roth Ira and ROth Solo 401k

Post by David Jay »

With your your income, I would open a Roth IRA in 2020 and try to contribute as much as possible (hopefully the full $6000) this year.

You can purchase all the types of investments that you have mentioned inside the Roth IRA account (although we would not recommend the individual stocks you mentioned).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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anaelmasri
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Re: Roth Ira and ROth Solo 401k

Post by anaelmasri »

David Jay wrote: Sun Sep 13, 2020 11:06 pm With your your income, I would open a Roth IRA in 2020 and try to contribute as much as possible (hopefully the full $6000) this year.

You can purchase all the types of investments that you have mentioned inside the Roth IRA account (although we would not recommend the individual stocks you mentioned).
what type of stocks do you recommend?

If you are considering to open both a traditional IRA and Roth IRA - what type of investment which you put in each retirement account to gain the most tax benefit.

stocks and etfs in Roth while Mutual funds and bonds in traditional? or vice versa?

thoughts?
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David Jay
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Re: Roth Ira and ROth Solo 401k

Post by David Jay »

anaelmasri wrote: Mon Sep 14, 2020 12:11 am
David Jay wrote: Sun Sep 13, 2020 11:06 pm With your your income, I would open a Roth IRA in 2020 and try to contribute as much as possible (hopefully the full $6000) this year.

You can purchase all the types of investments that you have mentioned inside the Roth IRA account (although we would not recommend the individual stocks you mentioned).
what type of stocks do you recommend?

If you are considering to open both a traditional IRA and Roth IRA - what type of investment which you put in each retirement account to gain the most tax benefit.

stocks and etfs in Roth while Mutual funds and bonds in traditional? or vice versa?

thoughts?
The contribution limit of $6000 per year applies to all IRA accounts. If one has both a traditional IRA and a Roth IRA, the total limit is still $6000 total. The big advantage to traditional IRA is for individuals in high tax brackets, I do not feel that a traditional IRA is a good choice for someone in your marginal tax bracket (12%).

At BH, we teach that the core holding for a retirement account should be in broad based mutual funds or ETFs. In your first year, I would recommend putting all contributions into VTI (Total US Stock Market). A complicated portfolio is not a better portfolio.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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anaelmasri
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Re: Roth Ira and ROth Solo 401k

Post by anaelmasri »

David Jay wrote: Mon Sep 14, 2020 7:41 am
anaelmasri wrote: Mon Sep 14, 2020 12:11 am
David Jay wrote: Sun Sep 13, 2020 11:06 pm With your your income, I would open a Roth IRA in 2020 and try to contribute as much as possible (hopefully the full $6000) this year.

You can purchase all the types of investments that you have mentioned inside the Roth IRA account (although we would not recommend the individual stocks you mentioned).
what type of stocks do you recommend?

If you are considering to open both a traditional IRA and Roth IRA - what type of investment which you put in each retirement account to gain the most tax benefit.

stocks and etfs in Roth while Mutual funds and bonds in traditional? or vice versa?

thoughts?
The contribution limit of $6000 per year applies to all IRA accounts. If one has both a traditional IRA and a Roth IRA, the total limit is still $6000 total. The big advantage to traditional IRA is for individuals in high tax brackets, I do not feel that a traditional IRA is a good choice for someone in your marginal tax bracket (12%).

At BH, we teach that the core holding for a retirement account should be in broad based mutual funds or ETFs. In your first year, I would recommend putting all contributions into VTI (Total US Stock Market). A complicated portfolio is not a better portfolio.
that is HUGE, I didnt know if you had two IRAs that the TOTAL for both would be $6k! I guess the roth solo 401k if I could if not brokerage is alternative.

VTI, VXUS, BND and VOO are my basis ETF at the moment to start, which is what I am considering.
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anaelmasri
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Re: Roth Ira and ROth Solo 401k

Post by anaelmasri »

the question is for everyone - how would you split your investments into your brokerage taxable account and your roth ira. where would you put your stocks, etfs and bonds in respectively?
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David Jay
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Re: Roth Ira and ROth Solo 401k

Post by David Jay »

anaelmasri wrote: Mon Sep 14, 2020 2:46 pm
David Jay wrote: Mon Sep 14, 2020 7:41 am The contribution limit of $6000 per year applies to all IRA accounts. If one has both a traditional IRA and a Roth IRA, the total limit is still $6000 total. The big advantage to traditional IRA is for individuals in high tax brackets, I do not feel that a traditional IRA is a good choice for someone in your marginal tax bracket (12%).

At BH, we teach that the core holding for a retirement account should be in broad based mutual funds or ETFs. In your first year, I would recommend putting all contributions into VTI (Total US Stock Market). A complicated portfolio is not a better portfolio.
that is HUGE, I didnt know if you had two IRAs that the TOTAL for both would be $6k! I guess the roth solo 401k if I could if not brokerage is alternative.

What was your 2019 “Schedule C” bottom line (income minus expenses)? You will only be able to contribute 50% of the Schedule C bottom line to a Solo 401K.

VTI, VXUS, BND and VOO are my basis ETF at the moment to start, which is what I am considering.

VOO (SP500) is unnecessary if you are using VTI (Total US Stock). All VOO stocks are also in VTI. You only need VTI, VXUS (Total International Stock) and BND (Total Bond).
And please open the Roth IRA first for 2020 to learn about and get comfortable with an investment account. At your income level, $6,000 per year is between 15% and 30% of income, which is a great start.

The Solo 401K will require much more attention to detail and it is better to “practice” with the Roth IRA first so you are only learning the special Solo 401K requirements when you open that account.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Roth Ira and ROth Solo 401k

Post by Spirit Rider »

David Jay wrote: Sun Sep 13, 2020 8:13 pm As I said above, only 1099 income can be used to qualify for Solo 401K and only 50% of your net self employment profit (revenue minus expenses).
I'm not sure where this 50% total limit is coming from.

Self-employed one-participant 401k contributions are based on net earnings from self-employment (earned income) = business profit - SE tax.

The OP can make employee deferrals up to 100% of earned income not to exceed the employee deferral limit (2020 = $19.5K).

The OP can also make employer contributions up to 20% of earned income. The only time 50% might come into effect is that the employer contribution is limited to 50% of (earned income - employee deferrals).
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anaelmasri
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Re: Roth Ira and ROth Solo 401k

Post by anaelmasri »

Spirit Rider wrote: Mon Sep 14, 2020 8:48 pm
David Jay wrote: Sun Sep 13, 2020 8:13 pm As I said above, only 1099 income can be used to qualify for Solo 401K and only 50% of your net self employment profit (revenue minus expenses).
I'm not sure where this 50% total limit is coming from.

Self-employed one-participant 401k contributions are based on net earnings from self-employment (earned income) = business profit - SE tax.

The OP can make employee deferrals up to 100% of earned income not to exceed the employee deferral limit (2020 = $19.5K).

The OP can also make employer contributions up to 20% of earned income. The only time 50% might come into effect is that the employer contribution is limited to 50% of (earned income - employee deferrals).
]
thats what I was told by a financial expert. DOes the solo 401k or roth solo 401k contribution from self employment has to be 1099 income? ior can some w2 Independent contractor work (I work in film production, different projects, different payroll companies but not permenant all year weekly work, its project dependent)
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Re: Roth Ira and ROth Solo 401k

Post by David Jay »

Spirit Rider wrote: Mon Sep 14, 2020 8:48 pm
David Jay wrote: Sun Sep 13, 2020 8:13 pm As I said above, only 1099 income can be used to qualify for Solo 401K and only 50% of your net self employment profit (revenue minus expenses).
I'm not sure where this 50% total limit is coming from.

Self-employed one-participant 401k contributions are based on net earnings from self-employment (earned income) = business profit - SE tax.

The OP can make employee deferrals up to 100% of earned income not to exceed the employee deferral limit (2020 = $19.5K).

The OP can also make employer contributions up to 20% of earned income. The only time 50% might come into effect is that the employer contribution is limited to 50% of (earned income - employee deferrals).
I was struggling with the Wiki - apparently I confused the employee contribution with the employer contribution. Not sure how this splits out with a Schedule C sole proprietor. I defer to your understanding.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Roth Ira and ROth Solo 401k

Post by Spirit Rider »

anaelmasri wrote: Mon Sep 14, 2020 9:31 pm
Spirit Rider wrote: Mon Sep 14, 2020 8:48 pm Self-employed one-participant 401k contributions are based on net earnings from self-employment (earned income) = business profit - SE tax.
DOes the solo 401k or roth solo 401k contribution from self employment has to be 1099 income?
I already explicitly answered this above and @David Jay also did so in the very first reply. Your other W-2 wages are not self-employment income and can not be the basis for employer retirement plan contributions.

You still haven't told us your W-2 wages, business profit and how much you want to contribute
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anaelmasri
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Re: Roth Ira and ROth Solo 401k

Post by anaelmasri »

Spirit Rider wrote: Tue Sep 15, 2020 7:05 am
anaelmasri wrote: Mon Sep 14, 2020 9:31 pm
Spirit Rider wrote: Mon Sep 14, 2020 8:48 pm Self-employed one-participant 401k contributions are based on net earnings from self-employment (earned income) = business profit - SE tax.
DOes the solo 401k or roth solo 401k contribution from self employment has to be 1099 income?
I already explicitly answered this above and @David Jay also did so in the very first reply. Your other W-2 wages are not self-employment income and can not be the basis for employer retirement plan contributions.

You still haven't told us your W-2 wages, business profit and how much you want to contribute
I am still figuring that out thats why I am assessing. roth solo 401k has options to contribute as employer or employee- now I am talking about the employee side if w2 type income , which is 70 percent or more of my 35k annual incomes, and not consistent percentage every year yet most of my income is w2 . so I want to contribute to that account once I max my roth but understanding what eactly and what percentage I can based on whether savings or 1099 or w2 and how that will be tracked is what I am trying to figure out
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David Jay
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Re: Roth Ira and ROth Solo 401k

Post by David Jay »

You have been told 4 times, you just don’t want to hear it: W-2 income is never “self employment” income.

https://www.bogleheads.org/wiki/Solo_401(k)_plan
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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David Jay
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Re: Roth Ira and ROth Solo 401k

Post by David Jay »

On another thread there was a link to Fidelity's Solo 401K calculator to determine how much one can contribute to an individual 401K: https://scs.fidelity.com/products/mobil ... bile.shtml

Note that one of the fields is “net business profit”.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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