Solo 401k vs Sep Ira vs unique solo401k

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jessikaur
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Solo 401k vs Sep Ira vs unique solo401k

Post by jessikaur » Wed Aug 15, 2018 12:04 pm

Hello all!

I am in a bit of a quandary. This is the first year that I am an independent contractor as well as employed.

With my employed position, I have already contributed my max 18.5k to their 401k.

I have about 100k in 1099 income and I’m deciding between theses options:

Sep IRA - free, but will preclude me from doing a back door roth.

Typical solo 401k. Also free. Will let me do employer contributions (all pretax) but no more additional employee contributions since I have already contributed 18.5k to my other 401k, can contribute up to 55k based upon how much salary I make (20% of net income with some calculations, for simplicity, let’s iust say it’s 20k) that I can contribute. Will I have 35k left over in this space. ... which leads to option 3.

Go to a broker that will make an special 401k that allows everything in version two, but Also allows non-Roth after tax contributions. So that I can contribute that extra 35k as after tax money, and then convert it to Roth IRA. Kind of like a major mega back door roth.
Here’s the rub, this account will take about 900 bucks to set up and then additional 200 bucks per year managment of the account.

Does it make sense to do this complicated second version, only to max out the space, OR should I stick to the normal
Version two and just invest the rest of the money in a taxable account ? Need help crunching the numbers ???? I anticipate that I will be doig this every year, so the one time fixed costs, should go away. I’m thinking about all
This extra Roth money.

Salary total for all is 300k ish. Hard to tell since the 1099 is variable.

Any advice would be appreciated. Thank you !

DSInvestor
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by DSInvestor » Wed Aug 15, 2018 12:15 pm

I'd go with a standard solo 401k and keep expenses low. Not sure if you're going to get a defined benefit pension but if not, it's nice to have tax deferred, Roth and taxable space in your portfolio.
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PFInterest
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by PFInterest » Wed Aug 15, 2018 12:19 pm

jessikaur wrote:
Wed Aug 15, 2018 12:04 pm
Hello all!

I am in a bit of a quandary. This is the first year that I am an independent contractor as well as employed.

With my employed position, I have already contributed my max 18.5k to their 401k.

I have about 100k in 1099 income and I’m deciding between theses options:

Sep IRA - free, but will preclude me from doing a back door roth.

Typical solo 401k. Also free. Will let me do employer contributions (all pretax) but no more additional employee contributions since I have already contributed 18.5k to my other 401k, can contribute up to 55k based upon how much salary I make (20% of net income with some calculations, for simplicity, let’s iust say it’s 20k) that I can contribute. Will I have 35k left over in this space. ... which leads to option 3.

Go to a broker that will make an special 401k that allows everything in version two, but Also allows non-Roth after tax contributions. So that I can contribute that extra 35k as after tax money, and then convert it to Roth IRA. Kind of like a major mega back door roth.
Here’s the rub, this account will take about 900 bucks to set up and then additional 200 bucks per year managment of the account.

Does it make sense to do this complicated second version, only to max out the space, OR should I stick to the normal
Version two and just invest the rest of the money in a taxable account ? Need help crunching the numbers ???? I anticipate that I will be doig this every year, so the one time fixed costs, should go away. I’m thinking about all
This extra Roth money.

Salary total for all is 300k ish. Hard to tell since the 1099 is variable.

Any advice would be appreciated. Thank you !
- dont do SEP as you have already mentioned the backdoor rIRA
- seems expensive to me, but again depends on what you value.
- read this and see if it fits your scenario: https://thefinancebuff.com/executing-me ... -401k.html

Spirit Rider
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by Spirit Rider » Wed Aug 15, 2018 12:19 pm

I think the $35K of additional Roth contribution space is worth the $900 startup cost and $200 annual fee. Probably not if it was < $10K. Although I'm not sure how to quantify this.

A DB plan with this amount of 1099 income is not going to provided any increased pre-tax contribution space. Tax-advantaged contribution space is still better than taxable.

Note: You are not going to find a brokerage to do this directly. This will be a Third Party Administrator (TPA) who may require one brokerage or allow you to select from a small list.

P.S. I do not recommend anyone with less than several years of adminstering a mainstream one-participant 401k plan and a solid understanding of all the after-tax issues. Roll their own plan as suggested in that link.

tfb has come to the same conclusion. After watching people try this when starting their very first one-participant 401k plan and screwing it up. People miss the very fact that at the end of the article, he cautions about trying this at home. Noting he has employee benefits experience. At least with these limited service TPA firms you have some support.

jessikaur
Posts: 56
Joined: Tue Mar 28, 2017 1:36 pm

Re: Solo 401k vs Sep Ira vs unique solo401k

Post by jessikaur » Fri Aug 17, 2018 5:04 pm

Spirit Rider wrote:
Wed Aug 15, 2018 12:19 pm
I think the $35K of additional Roth contribution space is worth the $900 startup cost and $200 annual fee. Probably not if it was < $10K. Although I'm not sure how to quantify this.

A DB plan with this amount of 1099 income is not going to provided any increased pre-tax contribution space. Tax-advantaged contribution space is still better than taxable.

Note: You are not going to find a brokerage to do this directly. This will be a Third Party Administrator (TPA) who may require one brokerage or allow you to select from a small list.

P.S. I do not recommend anyone with less than several years of adminstering a mainstream one-participant 401k plan and a solid understanding of all the after-tax issues. Roll their own plan as suggested in that link.

tfb has come to the same conclusion. After watching people try this when starting their very first one-participant 401k plan and screwing it up. People miss the very fact that at the end of the article, he cautions about trying this at home. Noting he has employee benefits experience. At least with these limited service TPA firms you have some support.

Now is the 35k Additional space still worth it if I have to sell off some of my taxable account o make the contribution in the first place ? It’s not like I’m an avid spender, I just happen to basically invest any left over money every month so it’s all tied up, now, I could try to earn that amount between now and tax time, but I may not make it :( Plus I still have to do the 20k employer contributions. And pay taxes on the 100k on the first place. boo!!!

retiredjg
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by retiredjg » Fri Aug 17, 2018 5:09 pm

Are you sure you can get what you want for that cost? I don't think so. For that cost, I think you have to be your own administrator and it is unlikely (not impossible) that you are prepared for that.

jessikaur
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by jessikaur » Fri Aug 17, 2018 5:31 pm

I called Nora. From here and recommended
on wci
(White coat investor). She’s gonna do the heavy lifting that’s what the fees are for for the form etc, I don’t plan on making any moves without her express consent.

retiredjg
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by retiredjg » Fri Aug 17, 2018 5:38 pm

Nora?

Spirit Rider
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by Spirit Rider » Fri Aug 17, 2018 9:26 pm

jessikaur wrote:
Fri Aug 17, 2018 5:04 pm
Now is the 35k Additional space still worth it if I have to sell off some of my taxable account o make the contribution in the first place ? It’s not like I’m an avid spender, I just happen to basically invest any left over money every month so it’s all tied up, now, I could try to earn that amount between now and tax time, but I may not make it :( Plus I still have to do the 20k employer contributions. And pay taxes on the 100k on the first place. boo!!!
Only you can judge the value of moving from taxable accounts and paying taxes to get future tax-free returns.

Maybe you can PM #Cruncher and see if they would be willing to do some calculations. Or maybe someone else can do so or point you in the right direction to quantify the choice.

Spirit Rider
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by Spirit Rider » Fri Aug 17, 2018 9:41 pm

retiredjg wrote:
Fri Aug 17, 2018 5:38 pm
Nora?
Nora Bethman is the President of National Employee Benefit Services, a third-party administrator (TPA). They are one of the handful of TPAs offering relatively low cost one-participant 401k plans that support employee after-tax contributions and in-service rollovers.

retiredjg
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by retiredjg » Sat Aug 18, 2018 7:15 am

Thanks Spirit Rider.

Jessikaur, perhaps things have changed. My reading of tfb's article is that "Nora" charges $100 a year just to maintain the document (keep it up to date each year). There is an additional fee of "under $500" each year for "Nora" to be the third party administrator. While an additional $100 a year is accurately described as "under $500", it is hard to imagine that she meant "about $100" when she said "under $500".

Maybe she's changed her fee schedule or maybe yours is a particularly simple case or maybe she's giving you a special deal, I don't know. I just want to be sure you are not headed off into being your own administrator when you probably actually need the expertise of a third party administrator.

As to how to do the math to figure out whether it is worth it, I don't know either. It certainly would be nice to get a lot of money into Roth but Roth is only some better than taxable, not infinitely better than taxable. There has to be a point where it is not worth extra expenses.

I'm wondering if it might be good to do it for a certain number of years and then switch to an ordinary free Solo 401k. That way, the extra money you got into Roth could continue to growth without your paying for the extra services each year.

jessikaur
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by jessikaur » Sun Aug 19, 2018 1:28 pm

The finance buff did the calculations:

https://thefinancebuff.com/after-tax-40 ... ution.html

Here’s the link to his article (without the inservics withdrawal) and still it beats taxable.
In this article are links to his other solo 401k articles which he has spread sheets for the calculations to help someone decide. If you have 30 years of growth the advantage is 28%.

I think based upon this it’s worth a shot and I’m gonna go for it ! Even with the 1k start up cost and the potential 350 yearly fee. I’m thinking after Nora does the legwork for me for a couple years, I’ll be able to get a handle on it and take care over... it’ll also give me more incentive to ace every year !

retiredjg
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by retiredjg » Sun Aug 19, 2018 3:19 pm

Thanks for the update.

jessikaur
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by jessikaur » Mon Aug 20, 2018 10:40 am

one more update because the above didn't quite answer my question:

OK, I did a bunch of research, and then just ended up back at the Finance Buff. He actually answered my question, AND has an excel worksheet people can use to put their numbers in. My question basically was, should I sell my taxable to contribute to non-roth post tax money, and then convert this to roth IRA (as I don't have any actual money to place 55K in immediately before next tax season comes up, but I DO have a large taxable account that I can tap into, I just didn't know if the tax consequences would be worth it)

https://thefinancebuff.com/after-tax-40 ... check.html

that's the article

and then this is the link to the excel worksheet.
https://docs.zoho.com/sheet/published.d ... 933a5bd2f8

basically posting here fore posterity sake in case someone else is struggling with this and comes on this website!

also, Nora's fee is 775; and then she charges 100$ maintenance fee, the up to/under 500 is basically if you want her other services like filling out the tax forms etc, it's like 45$ per form. I did the calculations... and we're talking thousands of dollars in savings for me, if I do it this way, even if I have to break up my taxable account a bit to get the contributions in for 2018, (and maybe even 2019!!!)

anyway, I am going for it, and I will post updates on any "headaches" that occur, but basically, Nora will do the heavy lifting, and I will pay her fees at least for the first several years until I "get the hang of it" and then maybe I can fill out my own forms...

DSInvestor
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by DSInvestor » Mon Aug 20, 2018 10:49 am

I would be in no hurry to realize capital gains triggering Fed Income Tax, State income tax, Federal Net Investment Income tax to make after-tax non-Roth contributions to a 401k. If your taxable account is large and throws off significant dividend income, collect the dividend in cash rather than reinvest and use the cash for contributions. This reduces the need to realize capital gains.
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tfb
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by tfb » Mon Aug 20, 2018 11:06 am

jessikaur wrote:
Mon Aug 20, 2018 10:40 am
My question basically was, should I sell my taxable to contribute to non-roth post tax money, and then convert this to roth IRA (as I don't have any actual money to place 55K in immediately before next tax season comes up, but I DO have a large taxable account that I can tap into, I just didn't know if the tax consequences would be worth it).
The workflow is:
1) You choose now as an employee how much you would contribute to the solo 401k, for example: 100% of income as after-tax non-Roth up to the IRS limit.
2) Wait until the business closes its books and determines what the 'income' in (1) really is.
3) (Optional) The business declares a profit sharing percentage. This goes into the plan pre-tax.
4) The business makes the after-tax non-Roth contribution as the employee chose in (1).

So just set up the plan, make the election, and wait until the year ends. Don't jump the gun.
Harry Sit, taking a break from the forums.

Spirit Rider
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Re: Solo 401k vs Sep Ira vs unique solo401k

Post by Spirit Rider » Mon Aug 20, 2018 10:53 pm

tfb wrote:
Mon Aug 20, 2018 11:06 am
The workflow is:
1) You choose now as an employee how much you would contribute to the solo 401k, for example: 100% of income as after-tax non-Roth up to the IRS limit.
2) Wait until the business closes its books and determines what the 'income' in (1) really is.
3) (Optional) The business declares a profit sharing percentage. This goes into the plan pre-tax.
4) The business makes the after-tax non-Roth contribution as the employee chose in (1).

So just set up the plan, make the election, and wait until the year ends. Don't jump the gun.
Employee after-tax contributions are non-elective contributions. There is no election to be made.

A self-employed individual has until their tax filing deadline including extensions to make after-tax contributions. They can choose the amounts to contribute anytime within the deadline(s) subject to 415c limits.

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