What to do when SEP IRA is only option?

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Jag295
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What to do when SEP IRA is only option?

Post by Jag295 » Thu Jan 11, 2018 10:39 pm

Hello,

I'm helping a family member get her financial house in order. Her new job only offers a profit sharing SEP IRA and no 401k. Contributions vary yearly based on how well the company does. Her income will be too high to contribute to a Roth IRA. She's fresh out of grad school and has ~$300k student debt refinanced to 3.5%. I helped her get a Roth IRA started last year. She obviously needs to prioritize her student loans, but I was trying to think of how to get her more tax protected space. Income this year will be ~$300k. Age 30. Right now she's got ~$15k in SEP IRA and $5k in Roth IRA. She's got an unrelated side hustle that makes about $10k. I have thought of a couple options and wanted to see if there were any other better ideas out there.

1. open a solo 401k with side hustle income and do a yearly transfer of the SEP IRA into the solo 401k to open up backdoor Roth IRA (although it seems like there are fees involved w the SEP IRA transfers which could add up)
2. try to convince employer to switch from SEP IRA to 401k
3. make non-deductible contributions to a traditional IRA
4. accept the limited options and just invest in taxable
Last edited by Jag295 on Fri Jan 12, 2018 12:31 pm, edited 1 time in total.

PFInterest
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Re: What to do when SEP IRA is only option?

Post by PFInterest » Fri Jan 12, 2018 12:46 am

if you only have a sep, you use a sep. then taxable.

DrGoogle2017
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Re: What to do when SEP IRA is only option?

Post by DrGoogle2017 » Fri Jan 12, 2018 12:51 am

Number 3, then do an immediate conversion to Roth.

Spirit Rider
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Re: What to do when SEP IRA is only option?

Post by Spirit Rider » Fri Jan 12, 2018 6:11 am

Option 1 is certainly viable depending on when the employer's SEP IRA contribution is made and when the rollover occurs.

What matters is that all pre-tax balances are $0 in all traditional, SEP and SIMPLE IRAs on 12/31 of the year any Roth conversion is done.

Why should there be any fees for a SEP IRA rollover? Once the contribution is made a SEP IRA account is just like any other IRA.

If they charge a fee for a rollover just do an indirect rollover once per year on the same date and make sure you do any other IRA to IRA moves by trustee to trustee transfer.

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djpeteski
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Re: What to do when SEP IRA is only option?

Post by djpeteski » Fri Jan 12, 2018 6:46 am

What kind of salary did she have in Grad school? What she in the sustenance level, like 30k per year?

Unless she being paid via 1099, she cannot open a solo 401K. Having the SEP contribution amount being dictated by someone else, suggests that is not really possible.

I would be happy with whatever SEP contributions are received and do a back door ROTH. Acting now, she can do this for both 2017 and 2018. Then she needs to kill the student loans. Can she wipe them out in 18 months? Two years at the max. She may have to continue to live off of her Grad school salary for a smart time, but she will forget all about that in a few years.

aristotelian
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Re: What to do when SEP IRA is only option?

Post by aristotelian » Fri Jan 12, 2018 7:16 am

djpeteski wrote:
Fri Jan 12, 2018 6:46 am
What kind of salary did she have in Grad school? What she in the sustenance level, like 30k per year?

Unless she being paid via 1099, she cannot open a solo 401K. Having the SEP contribution amount being dictated by someone else, suggests that is not really possible.
He says she has a side hustle making $10k. I would assume that is 1099 or unreported money. She could put that money in the Solo 401k as long as her combined contributions to the Solo 401k and SEP stay under the limits, correct?

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djpeteski
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Re: What to do when SEP IRA is only option?

Post by djpeteski » Fri Jan 12, 2018 10:21 am

aristotelian wrote:
Fri Jan 12, 2018 7:16 am
djpeteski wrote:
Fri Jan 12, 2018 6:46 am
What kind of salary did she have in Grad school? What she in the sustenance level, like 30k per year?

Unless she being paid via 1099, she cannot open a solo 401K. Having the SEP contribution amount being dictated by someone else, suggests that is not really possible.
He says she has a side hustle making $10k. I would assume that is 1099 or unreported money. She could put that money in the Solo 401k as long as her combined contributions to the Solo 401k and SEP stay under the limits, correct?
Yes, true thank you for point out my oversight. A SEP is limited to 25% of profit. What would be better is if she setups up a solo 401K.

I would check with a CPA about this, but I believe that the SEP contribution, from the other company, would only effect the 55K limit not the 18.5 limit. So, provided profits where sufficient she could contribute 18.5k to the solo 401k provided the SEP contribution was less than 36500.

aristotelian
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Re: What to do when SEP IRA is only option?

Post by aristotelian » Fri Jan 12, 2018 10:24 am

djpeteski wrote:
Fri Jan 12, 2018 10:21 am
Yes, true thank you for point out my oversight. A SEP is limited to 25% of profit. What would be better is if she setups up a solo 401K.

I would check with a CPA about this, but I believe that the SEP contribution, from the other company, would only effect the 55K limit not the 18.5 limit. So, provided profits where sufficient she could contribute 18.5k to the solo 401k provided the SEP contribution was less than 36500.
Yes, that was my thinking as well but I am by no means an expert on these things.

Spirit Rider
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Re: What to do when SEP IRA is only option?

Post by Spirit Rider » Fri Jan 12, 2018 10:44 am

The annual addition limit ($55K) is separate for each unrelated employer. Not that it matters in this case, but she could receive $55K from her employer and still contribute $55K to a one-participant 401k.

It is only the deferral limit that is across all SARSEP IRA, SIMPLE IRA, 401k and 403b. Since there is no employee deferral to a SEP IRA, she could defer 100% of her net self-employment earnings (business profit - 1/2 SE tax) up to $18.5K to a one-participant 401k.

Jag295
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Re: What to do when SEP IRA is only option?

Post by Jag295 » Fri Jan 12, 2018 12:40 pm

Thanks for your thoughts. Yes, debt reduction is priority #1, so student loans should be gone in 2 years. I did a little more digging this am, and I think option #1 could work out well. The side hustle is actually Schedule F income, and from what I've read can be used for a solo 401k.

The SEP IRA contributions will vary yearly, but will all be considered employer contributions.That means that pretty much all of the side hustle income will be able to be sheltered (up to 25% for employer and the $18.5k employee contributions).

Fortunately the SEP IRA contributions are made in January, so shouldn't be an issue to transfer it out before Dec 31 in order to make the backdoor Roth IRA option work. That will help her get another $5,500/yr into tax protected accounts once the student loans are gone.

Seems like a long run for a short slide, but I think over the course of her career it could really pay off...

Spirit Rider
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Re: What to do when SEP IRA is only option?

Post by Spirit Rider » Fri Jan 12, 2018 1:45 pm

For the self-employed the 25% of compensation is calculated as 20% of net self-employment earnings = business profit - 1/2 SE tax.

Jag295
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Re: What to do when SEP IRA is only option?

Post by Jag295 » Fri Jan 12, 2018 9:04 pm

I didn’t think of an HSA before but that will also help add some more space. It’s amazing how many option are available if you know where to look.

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