help me figure out the best retirement account type for my situation (i401k, 403b, etc.)

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mesmer
Posts: 30
Joined: Sun Sep 06, 2015 8:40 pm

help me figure out the best retirement account type for my situation (i401k, 403b, etc.)

Post by mesmer » Sat Jun 23, 2018 9:23 pm

I am hoping for some insight to help minimize tax liability and keep costs low for retirement savings in 2018. I have 3 primary options, as far as I can tell, which I will outline at the bottom of the post.

I recently transferred to another department within my state job with fewer hours so my salary for my W-2 job decreased to roughly 55K annually. I was previously maxing out both 457b (governmental) and 403b in addition to pension contributions. So far this year, I have only contributed to 457 and plan to max it out. My husband is maxing out his 401k and we match 100% or up 25% of his gross salary (it's his corporation and he is the only employee currently). We also already contributed the max via backdoor Roth for 2018 already.

At the end of last year I started my own business. I built up very slowly and I'm currently grossing roughly 7k per month. I am anticipating that it will earn between 30-50K this year after my expenses. I anticipate that next year I will earn low 6 figures after expenses (fewer expenses after this year and more work highly likely). Eventually I may transition to this full time in which case my earnings will increase since I bill my services by time spent.


Our tax bracket for 2018 will likely be 24%, but we could potentially get closer to 22% if more of the income is shielded.

As far as I can tell, these are my options for additional retirement savings:

Option 1: max out 403b
- no employer match
- Fidelity account with access to low cost index funds where I am already invested
- total contribution: 18.5K

Option 2: open solo 401k for independent business income
- I've read on this forum about Fidelity, Vanguard, and Schwab and I know the pros and cons. I prefer Fidelity or Vanguard as I already have accounts with both. Vanguard admiral shares are not available in their solo 401k but they do have a Roth option. I am also familiar with their system because we use it for my husband's 401k. Not sure what the cost differences would be long-term between Fidelity that has very low cost funds available in their 401k and no Roth. I think we may be too heavy on the pre-tax contributions so it could be nice to have a Roth option for that type of flexibility now or in the future.
- want an account I can keep long-term since I plan to continue growing the business
- Is it possible to contribute the entire 30-50K in income to solo 401k so I don't pay any tax on the earnings? Not sure exactly how much I would do.

Option 3: take a salary from my husband's corporation for work I currently do for free (light bookkeeping, tax reports, 401k administration, etc) and contribute to 401k through that plus likely a small match.
- I am not leaning towards this option because we would also pay extra payroll taxes if I start collecting a salary as an employee
- If I don't go with this option we will be taxed on what is left over in the corp as ordinary income
- My husband's business is much less likely to continue in the long-term (unclear if we will draw income from it after this year) so this wouldn't necessarily be a long-term account but with Vanguard where I have my Roth

I know SEP-IRA is also an option but since I've already done backdoor Roth contributions for the year (based on exceeding limit last year, though now that I've changed jobs we may not exceed this year) I don't want to do the necessary accounting for the SEP-IRA.


I am leaning either towards maxing 403b through my W-2 job or opening a solo 401k. Are there any administrative headaches or operating costs tied with i401k that should dissuade me? How much flexibility would I have on contribution amount? Anything else I'm not considering?

Thanks in advance for your insights!

feehater
Posts: 105
Joined: Fri Jul 14, 2017 10:14 am

Re: help me figure out the best retirement account type for my situation (i401k, 403b, etc.)

Post by feehater » Sun Jun 24, 2018 9:00 am

You are limited to 18.5k as your "employee" contribution whether you put it in the 403b, your solo 401k, or a combination of both. Beyond that, your solo 401k will allow you to put in about 20% of your net business income, but in traditional only, not Roth. There are online calculators that will tell you a reasonable approximation of the amount you can contribute. (This is also the same amount you could put in a SEP IRA if the backdoor Roth wasn't an issue). Solo 401ks are more of a hassle to set up than other retirement accounts, but nothing that about 10 pages of forms doesn't solve.

DesertGator
Posts: 19
Joined: Thu Jun 21, 2018 11:12 pm

Re: help me figure out the best retirement account type for my situation (i401k, 403b, etc.)

Post by DesertGator » Sun Jun 24, 2018 11:54 pm

Option 3 could be better than option 2, using your husband's existing company, existing 401k plan and existing payroll processes, particularly if the corporation has elected to be an "S-Corp" which you seem to imply. You and he may be able to reduce self-employment taxes on the profits above "a reasonable characterization of distributions as salary or dividends". I.e., you and he could elect to take a "reasonable" salary/wage for the work you do, pay that as W-2, and avoid payroll taxes for the remaining earnings - work with a CPA to determine what is reasonable. I don't know if your husband pays for health insurance but as an S-Corp the company may be able to pay the premiums and treat it is as a deductible expense.

KB

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Misenplace
Posts: 232
Joined: Mon Feb 01, 2016 9:46 pm

Re: help me figure out the best retirement account type for my situation (i401k, 403b, etc.)

Post by Misenplace » Mon Jun 25, 2018 12:24 am

You say your husband may not be continuing his business for much longer. If your husband wraps up his business, my understanding is that he would have to close his business 401k and each participant would need to roll their account into another 401k or IRA. Here is a thread on WCI that discusses the issue:

https://www.whitecoatinvestor.com/forum ... solo-401k/

mesmer
Posts: 30
Joined: Sun Sep 06, 2015 8:40 pm

Re: help me figure out the best retirement account type for my situation (i401k, 403b, etc.)

Post by mesmer » Mon Jun 25, 2018 10:04 pm

Thank you for everyone who has responded. You've all made me consider something I hadn't previously considered.

I am not sure that my husband would close the s-corp, but it's unclear whether the s-corp would continue having much business in the short-term. He may keep the company open but it wouldn't have profits, unless we learn that are many downsides to that. He could also choose to direct future earnings to his business for certain jobs.

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