[Roth IRA, SEP IRA - portfolio help requested]

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gopack3
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[Roth IRA, SEP IRA - portfolio help requested]

Post by gopack3 »

[Moved into a separate thread from: self-directed solo 401 k using Vanguard pooled account, etc. --admin LadyGeek]

Hello All! I’ve been following this discussion and have been trying to figure out what my best options are regarding possibly setting up an individual 401k for 2021 (as I know it’d already too late for this year). Some background:

-I am currently self-employed with a 1099 and file as a sole proprietor with no employees. I have been with the same company for 8 years full-time so the income is steady (they simply pay me as 1099 instead of W-2)

-I make $66,000/yr in pre-tax money, and my net profit is usually around $50k.

-I currently have accounts set up at Vanguard: 2 retirement accounts (Roth IRA & SEP IRA - the SEP was set up years ago with a financial advisor before I became more self-educated), as well as a regular taxable account. For tax year 2020, I was planning on maxing out the SEP IRA to get the best tax deduction. Ideally I would like everything to remain at vanguard because I’m a big fan.

-I do not have that much in the SEP IRA currently (after my max contribution for this year, it will be around $15k). This is the first year I’ve really decided to take ownership for my investments and I was definitely not contributing nearly enough as I should have been.

My end goal right now is to contribute as much to Roth funds that I can (obviously I am limited to just the regular $6k per year right now). I would really love to be able to contribute to Roth funds in an individual 401k (I don’t think I’d have enough money to complete the mega back door at this point because I may not even be able to max out the increased Roth contributions that the i401k allows each year.

My main questions are, does it make sense for me to do this? And what would be the best steps to accomplish this at Vanguard?

One thought I had to get around the non-rollover options is to roll my SEP IRA into my Roth since I don’t have a ton there, and then just open up an i401k at vanguard, but ideally I don’t expose myself to any tax liability through this process.

Any thoughts/insights would be appreciated.
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Duckie
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by Duckie »

Tbfuhrman, welcome to the forum.
Tbfuhrman wrote:-I am currently self-employed with a 1099 and file as a sole proprietor with no employees. I have been with the same company for 8 years full-time so the income is steady (they simply pay me as 1099 instead of W-2)
I'm surprised they are allowed to do this.
My end goal right now is to contribute as much to Roth funds that I can (obviously I am limited to just the regular $6k per year right now). I would really love to be able to contribute to Roth funds in an individual 401k
If you open a solo 401k at Vanguard you cannot roll the SEP IRA into it. However, your income is low enough to contribute to a Roth IRA directly so that is not a problem. You can contribute up to $19.5K to a Roth solo 401k account as the employEE and more to the pre-tax solo 401k account as the employER. Plus you can contribute up to $6K to the Roth IRA.
I don’t think I’d have enough money to complete the mega back door at this point because I may not even be able to max out the increased Roth contributions that the i401k allows each year.
The Mega backdoor is not a standard plan and is not an option in a Vanguard solo 401k.
My main questions are, does it make sense for me to do this?
Maybe. It depends on how much you expect to contribute. A solo 401k is a little more complicated and a little more work than a SEP IRA.
And what would be the best steps to accomplish this at Vanguard?
You need to:
  • Make sure you make no SEP IRA contributions for 2021. You can contribute for 2020 in 2021 but not for 2021.
  • You open a solo 401k at Vanguard with both the pre-tax and Roth employEE options checked.
One thought I had to get around the non-rollover options is to roll my SEP IRA into my Roth since I don’t have a ton there, and then just open up an i401k at vanguard, but ideally I don’t expose myself to any tax liability through this process.
Your income does not require you to "hide" your SEP IRA in order to make Roth IRA contributions. However, since the SEP IRA is so small you should consider making partial conversions to your Roth IRA over a few years to get rid of it, just a few thousand at a time.
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gopack3
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by gopack3 »

Duckie wrote: Sat Jan 02, 2021 7:24 pm Tbfuhrman, welcome to the forum.
Thank you for welcome and the detailed line by line responses! Instead of the solo 401k option at Vanguard, would it make more sense to do a self-directed Solo 401k through a third party (like 401kdiscount), roll the SEP IRA into it, and then open up a VRIP at Vanguard and transfer the self-directed 401k into it? That way I could have pooled accounts to separate out tax deductible contributions and Roth contributions? The strategy is laid out here in this thread:

viewtopic.php?f=1&t=250754

I thought there were advantages to doing it this way as opposed to the vanguard solo 401k as there is not nearly as much flexibility. Thank you again for your insight!
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Duckie
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by Duckie »

Tbfuhrman wrote:Instead of the solo 401k option at Vanguard, would it make more sense to do a self-directed Solo 401k through a third party (like 401kdiscount), roll the SEP IRA into it, and then open up a VRIP at Vanguard and transfer the self-directed 401k into it? That way I could have pooled accounts to separate out tax deductible contributions and Roth contributions?
I know nothing about pooled accounts. But a standard solo 401k separates pre-tax from Roth assets.
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gopack3
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by gopack3 »

Duckie wrote: Sat Jan 02, 2021 10:19 pm I know nothing about pooled accounts. But a standard solo 401k separates pre-tax from Roth assets.

got it, no worries! another question would be,in the prototype i401k at Vanguard, can Roth contributions (not earnings) be withdrawn tax and penalty free like they can in a regular Roth IRA?

in addition, can the Roth contributions in the i401k be rolled into my regular Roth IRA at some point? Or can I only do that with the self-directed i401k?
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Duckie
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by Duckie »

Tbfuhrman wrote:another question would be,in the prototype i401k at Vanguard, can contributions (not earnings) be withdrawn tax and penalty free like they can in a regular Roth IRA?
No. It's a 401k, not an IRA. There are rules on withdrawals (which I don't know).
in addition, can the Roth contributions in the i401k be rolled into my regular Roth IRA at some point?
Only when you close the plan.
Or can I only do that with the self-directed i401k?
That's it.
sophiainvests
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by sophiainvests »

Hi Tbfurhman -

Just a quick comment for now if I understand your situation: If you think you can go beyond the $19,500 roth solo 401 k employee contribution (or beyond $26,000 for 50 and over), then the third party plan (discount solo 401 k) is advantageous as you can also do after tax solo 401 k contribution for the year and roll over to your roth IRA shortly after contributing. (If you wouldn't put away more than these maxes each year, maybe your situation is simple enough to use a boilerplate plan at Vanguard rather than going for 3rd party plan provide and pooled account - it used be the case that vanguard only offered investor shares and no brokerage though for their solo 401k - I think the investor shares having had higher management fees may not be an issue anymore, but not sure about brokerage.) Since your income is in the sweet spot, if you do want to go beyond the $19,500/$26,000 contribution each year, the third party plan (e.g. discount solo 401 k) will allow you to put away more total funds than a boiler plate plan without after tax (since the employer tax deferred bucket I believe is limited to 20% of net SE income). I have used discount solo 401k and the start up fee was something like $525 first year, but after that it's just $100 per year. I have not used the vanguard pooled account to hold any funds except for the 401 k roth funds yet - have been a little worried about getting confused, so instead keep three bank accounts and only move the roth 401 k over to vanguard. But if you do mutual funds in the pooled account vanguard can set it up so there are different account numbers for same funds for each of roth, deferred, and after tax, if you want to keep track. Another option is, now that ETF trades are free many places, you could go for Fidelity or another place that allows you to set up multiple trust accounts to keep stuff separately even if Vanguard ETFs are your preference. I might have considered that if starting today instead of when I did. If you use the brokerage part of the pooled account at Vanguard, there is no easy way of to keep the roth, deferred, and after-tax funds separate, unless you just invest in different ETFs for the different fund types (roth, deferred and after tax) and keep track. If you want to use the pooled account just for roth 401 k, you can set up bank accounts and roll the after tax 401k into your roth IRA. You could keep using your SEP for the employee portion when you want to do deferred. (Actually there are some issues with that, I think some places, especially Vanguard, may not allow you to do both SEP and qualified plan/401k concurrently, but for others it is okay - it may depend on the SEP statement - Schwab has prototype SEP (it's own custom statement) that does not disallow qualified plan concurrent to the SEP I believe. There might be an issue that you have to set the SEP up before the 401k - I can't remember, but I do remember at the time I researched it Vanguard was adamant you couldn't have both if your SEP was with them and it may say so in their boilerplate SEP plan. Not sure if this is still the case.

Yeah, and I think I also have found (as stated above by another poster) that you cannot transfer your employee contribution to roth 401k out of your 401k until you close it down or retire. I believe most plans may allow you to transfer out/ roll out your employer contribution (and perhaps after-tax if you have it) after something like 5 years (can't remember if the plan needs to be 5 years old or the funds need to be there 5 years - or if it is either or and one is 5 years and one is 3 years)...This will be in the plan statement.
Topic Author
gopack3
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by gopack3 »

sophiainvests wrote: Sat Jan 02, 2021 10:35 pm Hi Tbfurhman -

Just a quick comment for now if I understand your situation: If you think you can go beyond the $19,500 roth solo 401 k employee contribution (or beyond $26,000 for 50 and over), then the third party plan (discount solo 401 k) is advantageous as you can also do after tax solo 401 k contribution for the year and roll over to your roth IRA shortly after contributing. (If you wouldn't put away more than these maxes each year, maybe your situation is simple enough to use a boilerplate plan at Vanguard rather than going for 3rd party plan provide and pooled account - it used be the case that vanguard only offered investor shares and no brokerage though for their solo 401k - I think the investor shares having had higher management fees may not be an issue anymore, but not sure about brokerage.) Since your income is in the sweet spot, if you do want to go beyond the $19,500/$26,000 contribution each year, the third party plan (e.g. discount solo 401 k) will allow you to put away more total funds than a boiler plate plan without after tax (since the employer tax deferred bucket I believe is limited to 20% of net SE income). I have used discount solo 401k and the start up fee was something like $525 first year, but after that it's just $100 per year. I have not used the vanguard pooled account to hold any funds except for the 401 k roth funds yet - have been a little worried about getting confused, so instead keep three bank accounts and only move the roth 401 k over to vanguard. But if you do mutual funds in the pooled account vanguard can set it up so there are different account numbers for same funds for each of roth, deferred, and after tax, if you want to keep track. Another option is, now that ETF trades are free many places, you could go for Fidelity or another place that allows you to set up multiple trust accounts to keep stuff separately even if Vanguard ETFs are your preference. I might have considered that if starting today instead of when I did. If you use the brokerage part of the pooled account at Vanguard, there is no easy way of to keep the roth, deferred, and after-tax funds separate, unless you just invest in different ETFs for the different fund types (roth, deferred and after tax) and keep track. If you want to use the pooled account just for roth 401 k, you can set up bank accounts and roll the after tax 401k into your roth IRA. You could keep using your SEP for the employee portion when you want to do deferred. (Actually there are some issues with that, I think some places, especially Vanguard, may not allow you to do both SEP and qualified plan/401k concurrently, but for others it is okay - it may depend on the SEP statement - Schwab has prototype SEP (it's own custom statement) that does not disallow qualified plan concurrent to the SEP I believe. There might be an issue that you have to set the SEP up before the 401k - I can't remember, but I do remember at the time I researched it Vanguard was adamant you couldn't have both if your SEP was with them and it may say so in their boilerplate SEP plan. Not sure if this is still the case.

Yeah, and I think I also have found (as stated above by another poster) that you cannot transfer your employee contribution to roth 401k out of your 401k until you close it down or retire. I believe most plans may allow you to transfer out/ roll out your employer contribution (and perhaps after-tax if you have it) after something like 5 years (can't remember if the plan needs to be 5 years old or the funds need to be there 5 years - or if it is either or and one is 5 years and one is 3 years)...This will be in the plan statement.
Sophia! I was hoping I might get you :) thank you so much for taking the time to respond.

In all honesty, I still feel a bit in over my head with this and may just stick with the Roth and SEP IRA for now. I have a considerable amount of savings right now, but I doubt that I’d be able to contribute more on a year-to-year basis than what the current maximums allow. Still a lot to think about!

Thank you once again for all your insight and I’ll be sure to reach out if I think of any other questions!
Topic Author
gopack3
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by gopack3 »

Following up on this is anyone is still reading: if my goal is to get as much money into a Roth IRA as possible (and my tax liability is low - i.e. contributing to a SEP IRA won’t do me much good because my taxable income is super low (around 30k).

Couldn’t I just do the following?

1. Convert the SEP IRA into the Roth for tax year 2020 knowing that it will be a taxable event, albeit small because there isn’t much in there.

2. Open a Traditional IRA at Vanguard and then execute the back door Roth for 2021

I guess I could still get more Roth funds into a solo 401k instead of this strategy. Or I could do both I guess, open the solo 401k and also do a back door roth at vanguard via the traditional IRA route.
sophiainvests
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by sophiainvests »

Hi Tbf. Will see what others say, but I don't understand why you would do a traditional IRA. If your taxable income is not that high, then I believe you will qualify for directly doing a Roth IRA each year (2020 limit is $6,000 or $7,000 if you are 50 or over). I believe it is "either or" on the annual Roth IRA versus traditional IRA contributions - that is, you choose one. So you could just choose Roth IRA and then not worry about back door (traditional IRA->Roth IRA) - I think that is just used by people who make too much to go straight to Roth IRA, though maybe I've misunderstood your situation. But then in addition to the Roth IRA you could either continue with the SEP (convert it to Roth each year if you want more Roth) or do solo 401 k, which may allow you to get a larger total into Roth.
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gopack3
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by gopack3 »

sophiainvests wrote: Sun Jan 03, 2021 6:20 pm Hi Tbf. Will see what others say, but I don't understand why you would do a traditional IRA. If your taxable income is not that high, then I believe you will qualify for directly doing a Roth IRA each year (2020 limit is $6,000 or $7,000 if you are 50 or over). I believe it is "either or" on the annual Roth IRA versus traditional IRA contributions - that is, you choose one. So you could just choose Roth IRA and then not worry about back door (traditional IRA->Roth IRA) - I think that is just used by people who make too much to go straight to Roth IRA, though maybe I've misunderstood your situation. But then in addition to the Roth IRA you could either continue with the SEP (convert it to Roth each year if you want more Roth) or do solo 401 k, which may allow you to get a larger total into Roth.
Ahh okay this makes sense. I totally forgot you can’t do both a $6k contribution to a Roth IRA as well as a $6k contribution to a traditional IRA because I have a SEP IRA, and I can do contributions to both the Roth and the SEP. I’ve already maxed out my regular Roth IRA contributions for 2020 and plan on doing so for 2021 shortly. so what you are saying is I am unable to contribute an additional $6,000 via a back door Roth for 2021 since I’ve already reached the regular Roth IRA maximum, right?

Am I also not allowed to convert my SEP IRA into Roth if I’ve already reached my maximum contribution for regular Roth IRA?

IT sounds like my best course of action is in fact a solo 401k and get more Roth contributions that way. My major decision is whether I go with a prototype plan or self-directed. I really wish Vanguard would allow my SEP to be converted into the Solo 401k. That would be the easiest thing to do. Really a bummer.
Last edited by gopack3 on Sun Jan 03, 2021 6:43 pm, edited 1 time in total.
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Duckie
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by Duckie »

Tbfuhrman wrote:so what you are saying is I am unable to contribute an additional $6,000 via a back door Roth for 2021 since I’ve already reached the regular Roth IRA maximum, right?
Right. The $6,000 max contribution (if under age 50) applies jointly to TIRAs and Roth IRAs.
Am I also not allowed to convert my SEP IRA into Roth if I’ve already reached my maximum contribution for regular Roth IRA?
You are allowed to roll/convert your SEP IRA to your Roth IRA. A conversion is not a contribution. There are no limits on conversions other than what you can afford tax-wise.
Topic Author
gopack3
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by gopack3 »

Duckie wrote: Sun Jan 03, 2021 6:43 pm
Tbfuhrman wrote:so what you are saying is I am unable to contribute an additional $6,000 via a back door Roth for 2021 since I’ve already reached the regular Roth IRA maximum, right?
Right. The $6,000 max contribution (if under age 50) applies jointly to TIRAs and Roth IRAs.
Am I also not allowed to convert my SEP IRA into Roth if I’ve already reached my maximum contribution for regular Roth IRA?
You are allowed to roll/convert your SEP IRA to your Roth IRA. A conversion is not a contribution. There are no limits on conversions other than what you can afford tax-wise.

So helpful, thanks!
sophiainvests
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by sophiainvests »

Yeah, as I understand it, if you decide not to do solo 401 k you can do the $6,000 Roth IRA each year and in addition send 0.2 x net SE income to your SEP and you could just convert that annually to your Roth IRA.

I think where the decision gets more complicated is if you want to get more of your SE income into retirement each year. Because the self-directed plans have the after tax option, if your income is in the sweet spot, that option could allow you in combination with the employee contribution I believe to get 100% of your net SE income into retirement/ Roth (if your income is below the max annual 401 k contribution). (For the after tax part you do what is called "mega back door roth.") But there are some things to be careful about to make sure you don't over contribute if your income is close to the annual 401 k contribution limit I believe.

Since you may not want to put that much away each year, if you are happy enough with $19,500 (employee Roth 401 k) + $6,000 (if under 50), then you could do Vanguard's prototype 401 k, which has Roth 401k option. (In the past, I didn't like it because they only offered investor shares, which had higher management fees, but I think nowadays that may not be an issue?)

If you want to put more away than the above each year, then you might consider the self-directed 401 k such as from discount solo 401 k.

There is also as I alluded earlier some haziness on having a SEP and 401 k at the same time - I think it can be done but it might depend on how the SEP is stated and maybe (I can't remember clearly if this following point matters) which one is set up first. Some years ago, Vanguard told me you cannot have both and I think the statement of their SEP may allude to that or maybe it is just their internal policy. Schwab may be a better option. But if you have self-directed 401 k you can I believe also do internal conversion of the tax deferred part (employer contribution) if you use that (so you wouldn't need the SEP if you didn't mind keeping money in the roth part of the 401 k). I think I checked and e-trade had in the past that option (internal roth conversion option) in their prototype plan. But I haven't looked into this stuff recently, so may be worth checking out what their prototype plans are all allowing these days.
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englishgirl
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by englishgirl »

I don't really understand why you want to contribute as much as possible to a Roth. You're at a relatively low income - do you expect to be in a much higher income in retirement so that paying the tax now vs later will be a big deal? Or do you want to avoid RMDs or something else? Can you afford to contribute the max $19.5k to a 401k (whether Roth or traditional) and the max to an IRA on a salary of around $50k? I mean, a retirement savings rate of about 50% is admirable but hard to do. And especially can you afford to contribute the max to a Roth 401k which is going to cost you more now than a traditional 401k would?

I have both a SEP IRA and a Roth IRA, and I contribute the max to both. Which is not very much because my business doesn't bring in giant amounts of money - it's a similar amount to you although a bit less. More money goes into my Roth IRA than into the SEP but I really appreciate the deduction in my taxes that putting 20% into the SEP brings, and I feel like I get "tax diversification" by contributing to my Roth. I have no need of a 401k because I don't make enough to be able to contribute the max anyway. [And, full disclosure, I am already in my semi-retirement career so I am not trying to catch up on my retirement savings.] Bogleheads in general tend to always say that solo 401k is better than SEP IRA but that's assuming that you are going to max out contributions on an income of $200k+ or something. If your business grows you could always open a solo 401k later, but you said it's steady income so I not sure that there is any need for you to change your current account setup. I haven't seen any real reasons in your posts as to WHY you want to fund more Roth account and why you don't want to continue with a very simple SEP?
Sarah
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gopack3
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by gopack3 »

englishgirl wrote: Sun Jan 03, 2021 7:54 pm I don't really understand why you want to contribute as much as possible to a Roth. You're at a relatively low income - do you expect to be in a much higher income in retirement so that paying the tax now vs later will be a big deal? Or do you want to avoid RMDs or something else? Can you afford to contribute the max $19.5k to a 401k (whether Roth or traditional) and the max to an IRA on a salary of around $50k? I mean, a retirement savings rate of about 50% is admirable but hard to do. And especially can you afford to contribute the max to a Roth 401k which is going to cost you more now than a traditional 401k would?

I have both a SEP IRA and a Roth IRA, and I contribute the max to both. Which is not very much because my business doesn't bring in giant amounts of money - it's a similar amount to you although a bit less. More money goes into my Roth IRA than into the SEP but I really appreciate the deduction in my taxes that putting 20% into the SEP brings, and I feel like I get "tax diversification" by contributing to my Roth. I have no need of a 401k because I don't make enough to be able to contribute the max anyway. [And, full disclosure, I am already in my semi-retirement career so I am not trying to catch up on my retirement savings.] Bogleheads in general tend to always say that solo 401k is better than SEP IRA but that's assuming that you are going to max out contributions on an income of $200k+ or something. If your business grows you could always open a solo 401k later, but you said it's steady income so I not sure that there is any need for you to change your current account setup. I haven't seen any real reasons in your posts as to WHY you want to fund more Roth account and why you don't want to continue with a very simple SEP?
Thanks for the insight Sara! A couple of thoughts:

-one of the primary reasons I like the idea of contributing so much to Roth funds is that (at least in the Roth IRA), contributions can be withdrawn without any penalty, and I like the idea of having access to those contributions should the situation arise (although this is probably just a mental thing as I already have a solid emergency fund in a high yield savings account). This is just something I’ll have to get over.

I guess I also need to do more research on the availability of contributions for Roth funds in a solo 401k too, because I believe there can be tax liability there since it may not be possible to withdraw only contributions without also withdrawing earnings, although I am hazy on this.

-another part of this is that my fiancée is a dentist and will likely be making an increasing salary (she’s already unable to contribute to a Roth), so our joint incomes might put us out of range for Roth contributions once we are married. I should have mentioned this earlier.

-I will have to do the math on my taxes this year, but I’m already at the 10% rate and a SEP max contribution will likely save me minimal amounts (I’ll have to figure out specifically how much to contribute this year). Whereas with a solo 401k, I could contribute more to Roth funds where I feel like I would get a better return in the long run.
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gopack3
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by gopack3 »

another question I have - my fiancée does not currently have a Roth IRA and cannot contribute to one because her income is too high. Eventually, she will plan to do backdoor roth. Does she need to first open a Roth IRA and simply not contribute? Or when she goes to convert the non-deductible traditional IRA contribution, will it automatically create a Roth IRA account when doing the conversion?
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gopack3
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by gopack3 »

a final question in case anyone is still around:

If I set up a solo 401k with etrade, is there any difference in buying vanguard index funds (such as VTSAX, VBTLX, and VTIAX) on etrade compared to vanguard? It appears the expense ratios are the exact same and I can still get admiral shares on etrade:

https://www.etrade.wallst.com/v1/stocks ... mbol=VTSAX

There also don’t appear to be any transaction fees. Is there etrade fees I’m missing?
deserat
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by deserat »

I have an LLC, sole proprietor. I have an SEP IRA at Vanguard. I also have a Roth at Vanguard. What I have done over the years is to max out the SEP IRA. I did not contribute to the Roth (issues then with the now ex-spouse and our income). I am now converting funds from the SEP IRA to the Roth up to the tax bracket in which I wish to pay. When I opened my LLC, there was not an easy 401K option like there is now - had to be set up with an accountant and I was happy with the SEP IRA.

I had never heard about a Back-Door Roth before, but as I understand it, essentially one maxes out their tax-deferred contribution to an IRA and then converts that amount to a Roth (and paying the taxes on the converted amount) the same year.

So, each year a person is allowed a certain amount of money to be contributed to a Roth (based on their income level) without having to transfer or convert funds from a tax-deferred account to the Roth. If someone wishes to contribute more to the Roth, they will first have to place funds in a tax deferred account and then do a Roth conversion.

To me, it all boils down to what tax bracket you believe you will be in when you are required to take distributions from your tax deferred accounts. It also requires that I have after-tax funds available to pay the taxes required from the conversion.

There are some fairly sophisticated models that will allow you to 'test out' what you believe your scenarios may be.

I am older, so did not have some of the investment vehicles nor broad available knowledge that we have now. If I were starting out today or were 10-20 years younger I would do the following (assuming I had my emergency fund at the level I required):

1) Max out Roth ($6K-7K)
2) Max out any tax deferred to employer match (if employed)
3) Max out IRA/SEP IRA/401K
4) If in a lower tax bracket and had the cash available, convert tax-deferred IRA/401K assets to Roth at level of comfort
5) Would balance 3 and 4 above with what I might want available in after-tax investments

I would use the 3 Fund approach with sliding AA based on risk tolerance. If I had a pension available (outside of SS), I would possibly take on more AA risk. I would also try to make my retirement lifestyle costs be covered by the pension/SS if possible.

I did not do 4 above until recently. I will have a couple of years of little to no income and will work to convert to the 24% bracket as I believe tax rates will be rising in the future and I have pensions that are COLA and will keep me in the mid-higher tax brackets.

As self-employed you can contribute a lot more to the tax deferred space. However, you also have to cover your expenses and pay the employer portion of SS. As with anything, there are trade-offs.
Spirit Rider
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by Spirit Rider »

deserat wrote: Mon Jan 04, 2021 6:31 am I had never heard about a Back-Door Roth before, but as I understand it, essentially one maxes out their tax-deferred contribution to an IRA and then converts that amount to a Roth (and paying the taxes on the converted amount) the same year.
No.

You make a non-deductible contribution to traditional IRA. If you have no pre-tax balances in all traditional, SEP and SIMPLE IRA accounts. You then do a Roth conversion with little to no tax liability.
deserat
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Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by deserat »

Spirit Rider wrote: Mon Jan 04, 2021 11:07 am
deserat wrote: Mon Jan 04, 2021 6:31 am I had never heard about a Back-Door Roth before, but as I understand it, essentially one maxes out their tax-deferred contribution to an IRA and then converts that amount to a Roth (and paying the taxes on the converted amount) the same year.
No.

You make a non-deductible contribution to traditional IRA. If you have no pre-tax balances in all traditional, SEP and SIMPLE IRA accounts. You then do a Roth conversion with little to no tax liability.
Ahh, I see now...I now know why it can be fairly complex to do a 'back-door' Roth especially if you have significant tax deferred assets in the IRA, hence the calculations to determine taxed versus untaxed portions.

I still don't see how the tax burden is relieved. If it is a non-deductible contribution, doesn't that mean taxes were already paid on the contribution? Where I see the benefit is the immediate transfer to the Roth which then allows growth tax free. It also allows people who have incomes above the levels allowed for Roth contributions to have the benefit of the Roth at the time of contribution.
Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: [Roth IRA, SEP IRA - portfolio help requested]

Post by Spirit Rider »

deserat wrote: Mon Jan 04, 2021 1:17 pm It also allows people who have incomes above the levels allowed for Roth contributions to have the benefit of the Roth at the time of contribution.
That is both its name and purpose.
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