Taxes - Sep IRA, Solo 401 K, TSP

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CAGR
Posts: 13
Joined: Tue Jan 30, 2018 6:26 pm

Taxes - Sep IRA, Solo 401 K, TSP

Post by CAGR » Fri Jul 13, 2018 8:14 am

I need some help figuring out how to make some tax decisions.

I currently have TSP account, Roth IRA account, Traditional IRA account (20k), and a SEP IRA account (120K).

I have most of my investments in a taxable account and trying to maximize tax efficiency.

I get about 750K in 1099 income and want to determine the best tax strategy going forward.

Up to now, I have maxed the TSP contribution and placed the remainder in the SEP IRA.

I have not done a backdoor Roth because I was told I would have to pay taxes on the traditional IRA/SEP IRA amounts if I converted them to my roth account?

Tax situation: I have no state income tax and in 37% bracket with no expected changes in income/tax situation until retirement around 20 years from now.

Questions:

1) Should I start doing a backdoor roth and if so what do I need to do it? Convert the traditional and SEP to a roth and pay the taxes on it?

2) Any advantages to an indiv 401K (such as rolling over traditional IRAs/SEP) to allow for backdoor Roth I should consider? I read the WCI article on SEP vs indiv 401 K and doesnt seem from there to provide much additional benefit. . . .unless there is something advantageous about converting/rolling over to facilitate the backdoor roth?

2) My wife does some work for my for my business but also has a W2 job with a 401K. Can I add her to either the SEP IRA or a new indiv 401K? From what I have read, her 401K limit through her W2 is 18.5K but seems that she would then be able to add up to 55K in an indiv 401K. Could she also be added to my SEP and have contributions up to 55K?

3) I am looking at a defined benefit plan/cash balance plan but the costs seem pretty high - I will have to do some more research to see if the costs are worth it but would appreciate any thoughts on these plans.

Appreciate your time/thoughts

niceguy7376
Posts: 2015
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by niceguy7376 » Fri Jul 13, 2018 8:41 am

You have a 750K 1099 and a job at govt (contributing to TSP)?
Please clarify and provide more details about your and your spouse full time jobs for better inputs.
Does your spouse contribute the max to 401k?

For those high income earners, a solo 401k would be a good choice compared to SEP IRA (for backdoor roth ) but a better option might be a defined benefit plans and such where you would be able to save more than 53k per year.

CAGR
Posts: 13
Joined: Tue Jan 30, 2018 6:26 pm

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by CAGR » Fri Jul 13, 2018 8:50 am

I have a part-time government job (VA) that enables me to contribute to TSP and my own business that provides the 1099 income.
I probably will continue the VA work for the next 3-5 years. My wife maxes out her 401K through work with a 5% employer match.
Appreciate the help.

Spirit Rider
Posts: 8118
Joined: Fri Mar 02, 2007 2:39 pm

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by Spirit Rider » Fri Jul 13, 2018 9:46 am

CAGR wrote:
Fri Jul 13, 2018 8:14 am
Up to now, I have maxed the TSP contribution and placed the remainder in the SEP IRA.
The TSP contributions does not affect your annual addition limit (2018 = $55K) for either a SEP IRA or a one-participant 401k plan.
Questions:

1) Should I start doing a backdoor roth and if so what do I need to do it? Convert the traditional and SEP to a roth and pay the taxes on it?
Yes, you should most definitely start doing Backdoor Roths. Rollover all pre-tax balances to in all traditional, SEP and SIMPLE IRA accounts to a 401k that accepts IRA rollovers. The TSP does as well as many one-participant 401k plans, but not Vanguard's Individual 401k.
2) Any advantages to an indiv 401K (such as rolling over traditional IRAs/SEP) to allow for backdoor Roth I should consider? I read the WCI article on SEP vs indiv 401 K and doesnt seem from there to provide much additional benefit. . . .unless there is something advantageous about converting/rolling over to facilitate the backdoor roth?
A one-participant 401k plan has two main advantages over a SEP IRA:
  1. You can make employee elective contributions that allow greater contributions at lower net self-employment earning levels. However, the maximum such contributions would be the employee elective contribution limit (2018 = $18,500) such contributions to the tsp.
  2. Assets in a SEP IRA interfere with the Backdoor Roth. Not those in a one-participant 401k plan.
3) My wife does some work for my for my business but also has a W2 job with a 401K. Can I add her to either the SEP IRA or a new indiv 401K? From what I have read, her 401K limit through her W2 is 18.5K but seems that she would then be able to add up to 55K in an indiv 401K. Could she also be added to my SEP and have contributions up to 55K?
Yes, but the maximum employer contribution limit would be 25% of her W-2 Box 1 wages. It would take $220K in wages for her to receive the maximum employer contribution. Also, you would be paying 15.3% FICA (7.65% employee + 7.65% employer) up to the SS maximum wage base ($128,400). Additionally, can only pay her a Fair Market Value (FMV) wage for the business necessary tasks and only the number of hours to complete them
4) I am looking at a defined benefit plan/cash balance plan but the costs seem pretty high - I will have to do some more research to see if the costs are worth it but would appreciate any thoughts on these plans.
What is your age? Generally, you need to be into your 40s before such a plan is better than a SEP IRA or a one-participant 401k plan. In that situation you could have a combined one-participant 401k plan and defined benefit plan. You can contribute up to the balance of the employee elective contribution limit + up to a 6% employer contribution on up to the compensation limit (2018 = $275K = $16,500) to a one-participant 401k plan + an actuarial based DB contribution. Once you are 45+, that can be $100K+.

CAGR
Posts: 13
Joined: Tue Jan 30, 2018 6:26 pm

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by CAGR » Fri Jul 13, 2018 11:33 am

Thanks Spirit Rider - info very helpful. I sent you a PM for some more details.

Sounds like the best plan will be to open an indiv 401K so I can continue to contribute to it. . .and use it to rollover my IRA and SEP IRA to facilitate the backdoor roth?

And I just wanted to make sure I understood what was written about my wife and the indiv 401K? Is she able to be in the indiv 401K if she does work for my side business? This would be separate from her involvement in a 401k through her W-2 employer.

Thanks again for your time/info

Spirit Rider
Posts: 8118
Joined: Fri Mar 02, 2007 2:39 pm

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by Spirit Rider » Fri Jul 13, 2018 2:03 pm

Short answer. Yes, she can participate in either a SEP IRA or one-participant 401k as long as you don't have/adopt employee eligibility restrictions preventing it.

dirtlaw
Posts: 9
Joined: Sat Jan 13, 2018 6:51 pm

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by dirtlaw » Fri Jul 13, 2018 3:09 pm

CAGR,

If I were you, and your $750,000 1099 income is from more than one source or is somewhat flexible, I'd consider having three single member LLCs each with a solo 401k, and max each out using employer contributions and roll them over to an IRA and do roth conversions at your leisure. Ex:

LLC 1
Gross 1099 income $250,000
Employer contribution of 20% = $50,000
Employee contribution up to 401k limit: $5,000

LLC 2
Gross 1099 Income $250,000
Employer contribution of 20% = $50,000
Employee contribution up to 401k limit: $5,000

LLC 3
Gross 1099 Income $250,000
Employer contribution of 20% = $50,000
Employee contribution up to 401k limit: $5,000

Total 401k contributions: $165,000 ($15,000 employee contribution, $150,000 employer contribution) which may reduce your current income tax bill by around $40,700.

Of course you'd need to consult a tax professional to confirm multiple solo 401ks are legal with independent contribution limits and consider the effect of AMT and other tax considerations on your scenario.

aristotelian
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Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by aristotelian » Fri Jul 13, 2018 3:17 pm

Just agreeing with the above, open Solo 401k, roll over SEP and Traditional IRA balances into the Solo 401k. Then you will be able to make employ-er contributions to the Solo 401k (same as you have been using your SEP) with the additional benefit of being able to do backdoor Roth.

CAGR
Posts: 13
Joined: Tue Jan 30, 2018 6:26 pm

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by CAGR » Fri Jul 13, 2018 3:31 pm

Thanks for responses - here is my plan that came through a PM from Spirit Rider that was very helpful.

Adding it here in case any other readers find the information useful for their circumstances.

Steps:
1) Open one-participant 401k
2) Rollover traditional IRA and SEP-IRA to TSP or one-participant 401k (preference TSP)
Then Recurring steps each year:
3) Fund traditional IRAs and then rollover to roth (backdoor roth steps)
4) Fund one-participant 401k for me and spouse.

CAGR
Posts: 13
Joined: Tue Jan 30, 2018 6:26 pm

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by CAGR » Fri Jul 13, 2018 3:35 pm

I want to verify my understanding of the contribution limits between the accounts . . . ..

For 2018 contribution limits:

IRA: 5500
Employee TSP/401k: 18500
Employer one-participant 401k: 55000

So if each is maximally funded you can place 5500 for IRA, 18500 into TSP/401k, and then 36,500 for one-participant 401k from employer?

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

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by Spirit Rider » Fri Jul 13, 2018 4:08 pm

dirtlaw wrote:
Fri Jul 13, 2018 3:09 pm
Total 401k contributions: $165,000 ($15,000 employee contribution, $150,000 employer contribution) which may reduce your current income tax bill by around $40,700.

Of course you'd need to consult a tax professional to confirm multiple solo 401ks are legal with independent contribution limits and consider the effect of AMT and other tax considerations on your scenario.
Absolutely will not work. The three LLCs are all owned by a single individual. This is a classic controlled group. The three LLCs will be viewed as one entity and there would be only one $55K annual addition limit.

Spirit Rider
Posts: 8118
Joined: Fri Mar 02, 2007 2:39 pm

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by Spirit Rider » Fri Jul 13, 2018 4:10 pm

CAGR, your last post is correct for someone < age 50 for 2018.

dirtlaw
Posts: 9
Joined: Sat Jan 13, 2018 6:51 pm

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by dirtlaw » Fri Jul 13, 2018 4:32 pm

Spirit Rider wrote:
Fri Jul 13, 2018 4:08 pm
dirtlaw wrote:
Fri Jul 13, 2018 3:09 pm
Total 401k contributions: $165,000 ($15,000 employee contribution, $150,000 employer contribution) which may reduce your current income tax bill by around $40,700.

Of course you'd need to consult a tax professional to confirm multiple solo 401ks are legal with independent contribution limits and consider the effect of AMT and other tax considerations on your scenario.
Absolutely will not work. The three LLCs are all owned by a single individual. This is a classic controlled group. The three LLCs will be viewed as one entity and there would be only one $55K annual addition limit.
hmm..How about LLC1 owned 90% by husband and 10% by wife, LLC2 owned 10% by husband and 90% by wife and LLC3 owned 50% by husband and 50% by wife?

Spirit Rider
Posts: 8118
Joined: Fri Mar 02, 2007 2:39 pm

Re: Taxes - Sep IRA, Solo 401 K, TSP

Post by Spirit Rider » Fri Jul 13, 2018 10:28 pm

Nope.

All LLCs would be considered 100% owned by by both spouses under attribution rules and stil considered a controlled group.

It doesn't matter what convoluted scheme you try to come up with. Congress and the IRS are not going to allow an indiviual to exceed one annual addition limit.

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