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another post about SEP vs backdoor

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  • Avatar ifonlyFI 
    Participant
    Status: Physician
    Posts: 96
    Joined: 08/23/2017

    I apologize about posting another topic about the same repeated question, but I literally can’t wrap my head around it:

     

    mid career;  W-2 500k

    S corp: 130k

    401k max per year (~50k)

    no other retirement count, no solo 401k, no IRA’s

     

    ~40% tax bracket (it’s easiest if I calculate at 40% in my head)

     

    owe: 38k to feds and state for 2018

     

    should I

    1.  SEP IRA $25k for 2018; tax bill decreases to 26k;  total out of pocket ~ 50k

    2.  back door 11k (spouse and I); no change in tax bill; total out of pocket ~ 50k

    3.  none of the above

     

     

     

    #197921 Reply
    Avatar ifonlyFI 
    Participant
    Status: Physician
    Posts: 96
    Joined: 08/23/2017

    as I read my post, I realize I don’t know what I’m talking about.

    Probably the best action would be to fund sep ira for 2018 which would reduce my 2018 burden.

    the better question is how should I plan for 2019:

    1.  keep SEP and fund yearly

    2.  convert SEP to roth/backdoor and pay the pro-rata conversion

    3.  open solo 401k and roll sep into it

    #197927 Reply
    Molar Mechanic Molar Mechanic 
    Participant
    Status: Dentist, Small Business Owner
    Posts: 364
    Joined: 10/29/2017

    Post 2, option 3.

    #197928 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7329
    Joined: 01/09/2016

    I think this will help you:

    Backdoor Solo-401k Plans

    I wrote it because this question comes up so often this time of year.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #197937 Reply
    Avatar ifonlyFI 
    Participant
    Status: Physician
    Posts: 96
    Joined: 08/23/2017

    thanks!

    #197950 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3618
    Joined: 01/08/2016

    fund SEP, then create solo 401k for 2019 and move/close the SEP there.

    then dont use a SEP going forward.

    #198074 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7329
    Joined: 01/09/2016

    wait how are you going to have a separate SEP when you already have a workplace 401k?

    Click to expand…

    ???

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #198079 Reply
    Liked by Peds
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3618
    Joined: 01/08/2016

    yea changed it. didnt see the Scorp income.

    #198082 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2126
    Joined: 06/24/2016

    I apologize about posting another topic about the same repeated question, but I literally can’t wrap my head around it:

     

    mid career;  W-2 500k

    S corp: 130k

    401k max per year (~50k)

    no other retirement count, no solo 401k, no IRA’s

     

    ~40% tax bracket (it’s easiest if I calculate at 40% in my head)

     

    owe: 38k to feds and state for 2018

     

    should I

    1.  SEP IRA $25k for 2018; tax bill decreases to 26k;  total out of pocket ~ 50k

    2.  back door 11k (spouse and I); no change in tax bill; total out of pocket ~ 50k

    3.  none of the above

     

     

     

    Click to expand…

    Max employer 401(k) which I assume can get to $56K max with good match/profit sharing.

    Do SEP-IRA for 2018 with 25% of S-corp wages, then open a 401(k) effective 1/1/2019 and rollover the SEP-IRA into it.

    Do $5,500 each in backdoor Roth IRAs for 2018 before tax day, and then do another $6,000 each for 2019.

    Aside, you are honestly prob best off dissolving your S-corp and filing as a sole proprietor so as not to pay the additional 6.2% in employer SS tax.  As of now you’d owe 9.1% in FICA on your S-corp wages versus 2.68% in self-employment tax, plus whatever you take as a distribution reduces what you could contribute to retirement.  For example, a $10,000 distribution only saves you $268 in taxes relative to a sole prop and and reduces your retirement contribution by $2,500, which would be worth $600-925 in tax savings.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #198239 Reply

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