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Have 403(b), 401(a) and solo401(k), want to do Mega BD Roth IRA but 403(b) limiting

Home Retirement Accounts Have 403(b), 401(a) and solo401(k), want to do Mega BD Roth IRA but 403(b) limiting

  • Avatar Hulk 
    Participant
    Status: Physician
    Posts: 9
    Joined: 09/04/2019

    Hello all,

    I am a W2 employee at my main job that provides a 403(b) for employEE salary deferral.  I defer 19k every year.  They also provide a 401(a) employER contribution of 8% up to limit of 280k, so $22,400 this year.

    I have started an unrelated side hustle and become profitable this year, made 4,800 so far.  I think I can scale this thing pretty easily and hope to make 50k – 100k in 2020 and keep growing.  I want to set up a solo 401(k) and looked at a WCI blog post that send me to mysolo401k.net which looks great.  Want to follow the example of several WCI posts about doing a mega backdoor Roth IRA with a side hustle.

    HOWEVER, all the examples show a W2 401(k) and a side hustle 1099 solo401(k) but my situation is different.  403(b)s are non-qualified plans so they play by different rules than qualified plans (i.e. 401(k)s). But I don’t totally understand

    From IRS Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans), 3. Limit on Annual Additions:

    Participation in a qualified plan. If you participated in a 403(b) plan and a qualified plan, you must combine contributions made to your 403(b) account with contributions to a qualified plan and simplified employee pensions of all corporations, partnerships, and sole proprietorships in which you have more than 50% control to determine the total annual additions.

    I believe this means the two plans have one combined annual addition limit. Correct? The solo401k plan’s maximum annual additions are limited by the 403b annual additions.  Is this correct?? Also, do I disregard the 401(a) contribution when calculating the contribution limit to the solo401(k)?

    Example:

    1099 profit 60k.  403(b) contribution 19k.  (and 401(a) contribution of 22,400).  Therefore, I could contribute 37K (56-19) after-tax to my solo401k, then Roth convert and roll to IRA.  Correct?

    Or alternatively I could split that 37k into pre-tax employer contributions, 20% of profit after accounting for SS and medicare tax, and the remaining amount as after-tax that I Roth convert and roll.  Correct?

    Would that look like this? 60k x 0.9855 x .2 = 11,826 contributed as pre-tax 1099 employER deferral and the remained contributed as 1099 after-tax, to then be Roth converted and Rolled to IRA.  37,000 – 11,826 = 25,174

    (0.9855 comes from the fact that I have maxed out SS tax at 132,900 at my main W2 job so don’t owe any more SS tax on my 1099 job and therefore only owe medicare tax at 2.9% on my side hustle.   I subtract half, 1.45%, from 1099 profit before multiplying by the max contribution allowed of 20% (for non-incorporated.  25% were I incorporated.)

     

    #243641 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4447
    Joined: 01/08/2016
    HOWEVER, all the examples show a W2 401(k) and a side hustle 1099 solo401(k) but my situation is different.  403(b)s are non-qualified plans so they play by different rules than qualified plans (i.e. 401(k)s). But I don’t totally understand

    Click to expand…

    its not different.

     

    #243690 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2381
    Joined: 03/01/2018

    if you defer 19k into your 403b then your employee elective deferral limit is exhausted

    this would mean you could only make employer profit sharing and/or employee voluntary after tax (non Roth) contributions. After tax contributions require a semi custom solo 401k as you seem to understand

    because 403b accounts are considered “controlled by the participant” they are aggregated with your solo 401k with regards to the annual addition limit. So your solo 401k annual addition limit would be 56k minus any amount contributed to the 403b

    if you go to the spreadsheet from The Finance Buff linked in my signature you can see how the numbers would work for you

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #243697 Reply
    Liked by Peds
    Avatar Hulk 
    Participant
    Status: Physician
    Posts: 9
    Joined: 09/04/2019
    HOWEVER, all the examples show a W2 401(k) and a side hustle 1099 solo401(k) but my situation is different.  403(b)s are non-qualified plans so they play by different rules than qualified plans (i.e. 401(k)s). But I don’t totally understand 

    Click to expand…

    its not different.

     

    Click to expand…

    They are definitely different.  How exactly, I am still working out.  401(k) is a qualified plan.  403(b) is a non-qualified plan.

    Universe of Qualified Plans 1. Defined-benefit pension plan 2. Cash-balance pension plan 3. Money-purchase pension plan 4. Target-benefit pension plan 5. Profit-sharing plan 6. 401(k) plan 7. Stock bonus plan 8. ESOP (employee stock ownership plan)

    Other Non-Qualified Tax-Advantaged Plans Available to Private Employers 1) SEPs (simplified employee pensions) 2) SIMPLEs (savings incentive match plans for employees) 3) 403(b) plans (limited to 501(c)(3) organizations and public school systems)

    #243722 Reply
    Avatar Hulk 
    Participant
    Status: Physician
    Posts: 9
    Joined: 09/04/2019

    if you defer 19k into your 403b then your employee elective deferral limit is exhausted

    this would mean you could only make employer profit sharing and/or employee voluntary after tax (non Roth) contributions. After tax contributions require a semi custom solo 401k as you seem to understand

    because 403b accounts are considered “controlled by the participant” they are aggregated with your solo 401k with regards to the annual addition limit. So your solo 401k annual addition limit would be 56k minus any amount contributed to the 403b

    if you go to the spreadsheet from The Finance Buff linked in my signature you can see how the numbers would work for you

    Click to expand…

    Wow, so helpful, thank you.  So your spread sheet does limit me to 37,000 on a solo401(k) if you also have a 403(b) that you have maxed at 19k, as I thought, regardless of the 1099 income amount.

    Spread sheet is saying 11,839 profit sharing on 60K of 1099 income (when W2 job has high salary and SS tax is maxed).  I had calculated 11,826.  (60,000 x 0.9855 x 20%) I wonder where I am wrong?  Bugs me I am off by $13!

    #243737 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1907
    Joined: 02/01/2016

    403b annual additions are aggregated with the annual additions of the one-participant 401k, but the other employer plans such as the 401a are not aggregated with either.

    Your one-participant annual additions are limited to $56K – (403b employee + employer contributions).

    #243754 Reply
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    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1907
    Joined: 02/01/2016
    Splash Refinancing Bonus

    Assuming $60K in business profits (business income – business expenses). What you missed from Schedule SE, is that your business profits subject to SE taxes = $60K * 92.35% = $55,410 to equal the playing field with W-2 employees. If you have exceeded the Social Security maximum wage base (2019 $132,900), and using rounding your 1/2 SE taxes are $55,410 * 2.9% = $604. Your self-employed earned income (business profit – 1/2 SE tax) = $60000 – $604 = $59,396. You maximum employer contribution is $59,396 * 20% = $11,879.

    #243759 Reply
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    Avatar Hulk 
    Participant
    Status: Physician
    Posts: 9
    Joined: 09/04/2019

    Assuming $60K in business profits (business income – business expenses). What you missed from Schedule SE, is that your business profits subject to SE taxes = $60K * 92.35% = $55,410 to equal the playing field with W-2 employees. If you have exceeded the Social Security maximum wage base (2019 $132,900), and using rounding your 1/2 SE taxes are $55,410 * 2.9% = $604. Your self-employed earned income (business profit – 1/2 SE tax) = $60000 – $604 = $59,396. You maximum employer contribution is $59,396 * 20% = $11,879.

    Click to expand…

    Thanks Spirt Rider.  I thought I had accounted for SE, thats why I was multiplying 60k * 0.9855 (half of medicare tax.  I ignored SS tax because it was already maxed above 132,900 at W2 job.) Two questions please

    Why do I have to multiply 60k by 92.35%?  That is composed of SS tax at 6.2% and medicare tax at 1.45%.  But cant I take out SS tax since it has already been paid to the max at other job?  W2 wage above 132,900.  I would then think 60k * 0.9855 = 59,130 accounting only for 1/2 medicare tax at 1.45%

    Also, your calculation is wrong or I am missing something.  55,410 * 2.9 does not equal 604.  1/2 of 2.9 doesn’t either.  55,410 * 2.9 = 1607.  Half of that is 803

    Thanks you so much for your helpful posts!

    #243771 Reply
    Avatar Larry Ragman 
    Participant
    Status: Other Professional
    Posts: 617
    Joined: 08/30/2018

    Does your 401a allow after tax contributions? If so, and it also allows in service withdrawals, you might also be able to use it for a mega backdoor Roth.  As Spiritrider points out, the 401a is not aggregated with the self-contribution plans and it gets a separate $56k limit.

    #243779 Reply
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    Avatar Hulk 
    Participant
    Status: Physician
    Posts: 9
    Joined: 09/04/2019
    Earnest refinancing bonus

    Does your 401a allow after tax contributions? If so, and it also allows in service withdrawals, you might also be able to use it for a mega backdoor Roth.  As Spiritrider points out, the 401a is not aggregated with the self-contribution plans and it gets a separate $56k limit.

    Click to expand…

    I’ve been petitioning for that, but currently no.

    #243790 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1907
    Joined: 02/01/2016

    As I pointed out in my previous post, Schedule SE explicitly directs you multiply your business profits by 92.35%. This is to level the playing ground with W-2 employees. A W-2 employee’s FICA taxes are based on their W-2 Box 1 wages. The employer is paying FICA on that amount. However, a self-employed individual is both employer and employee and pays both halves as SE taxes. So the base for calculating SE taxes is reduced by 7.65%. Note: It is 92.35% even if you are only subject to Medicare SE taxes. It would be a recursive calculation otherwise and the IRS decided to simplify the calculation.

    Yes, I did have a typo of $804 -> $604 and carried that through. $60000 – $804 = $59,196. Your maximum employer contribution is $59,196 * 20% = $11,839.

    #243825 Reply
    Liked by Peds, Larry Ragman
    Avatar SLC OB 
    Participant
    Status: Physician
    Posts: 565
    Joined: 06/23/2018

    I’m going to jump on this tread… I have asked before but pretty murky waters for me….

    First half of year, was 1099 at ~$225K; Second half of year I am W2 at ~$250-300K

    Have a solo401K.

    With W2:  I have a 457 (governmental) that I will contribute $19K; 401a that the employER will contribute about $16K this year (since only half the year, ~$32K next year). I can contribute 10% of salary up to $28K in post-tax to 401a and flip to Roth (AKA Mega-Backdoor Roth).

    I want to MAX everything I can…

    So:

    457 $19K

    401a -Question: if they contribute $16K, how much $$$ can I contribute in the 401a post-tax? Is there a max of $56K? Does that include my $19K in the 457?

    Solo401K: Can I contribute to this normally without worrying about the $56K through employer this year?

     

    So, lets fast forward to next year:

    Main gig: W2 at ~$550K+; side gig: ~$15K

    457: $19K

    401a: EmployER ~$32K; Does that mean I can only contribute up $56K-32K= $24K in post-tax to roll to mega-backdoor Roth or only $5K ($56K-19K-32K=5K)?

    Solo401K: max out the full $15K as employEE contribution? Or does it have to be EmployER due to my $19K in the 457 which would just be a percentage of the $15K?

     

    Thanks for helping to clear up the murky waters for me…

    #243829 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1907
    Joined: 02/01/2016

    401a -Question: if they contribute $16K, how much $$$ can I contribute in the 401a post-tax? Is there a max of $56K? Does that include my $19K in the 457? NO, a 457b is a non-qualified plan with a separate but equal to the employee elective contribution limit. You can contribute $56K – $16K = $40K in employee after-tax contributions to the 401a assuming there are no allocated forfeitures.

    Solo401K: Can I contribute to this normally without worrying about the $56K through employer this year? Yes, but the total can be $56K 401a + $19K 457b.

    2020 Main gig: W2 at ~$550K+; side gig: ~$15K

    457: $19K

    401a: EmployER ~$32K; Does that mean I can only contribute up $56K-32K= $24K in post-tax to roll to mega-backdoor Roth or only $5K ($56K-19K-32K=5K)? $24K.

    Solo401K: max out the full $15K as employEE contribution? Or does it have to be EmployER due to my $19K in the 457 which would just be a percentage of the $15K? The full self-employed earned income (business profits – 1/2 SE tax) up to the employee elective contribution limit. As I said above, the 457b has no affect.

    #243843 Reply
    Avatar SLC OB 
    Participant
    Status: Physician
    Posts: 565
    Joined: 06/23/2018

    401a -Question: if they contribute $16K, how much $$$ can I contribute in the 401a post-tax? Is there a max of $56K? Does that include my $19K in the 457? NO, a 457b is a non-qualified plan with a separate but equal to the employee elective contribution limit. You can contribute $56K – $16K = $40K in employee after-tax contributions to the 401a assuming there are no allocated forfeitures.

    Solo401K: Can I contribute to this normally without worrying about the $56K through employer this year? Yes, but the total can be $56K 401a + $19K 457b.

    2020 Main gig: W2 at ~$550K+; side gig: ~$15K

    457: $19K

    401a: EmployER ~$32K; Does that mean I can only contribute up $56K-32K= $24K in post-tax to roll to mega-backdoor Roth or only $5K ($56K-19K-32K=5K)? $24K.

    Solo401K: max out the full $15K as employEE contribution? Or does it have to be EmployER due to my $19K in the 457 which would just be a percentage of the $15K? The full self-employed earned income (business profits – 1/2 SE tax) up to the employee elective contribution limit. As I said above, the 457b has no affect.

    Click to expand…

    Super helpful! Thank you very much!!!

    #243873 Reply
    Avatar Hulk 
    Participant
    Status: Physician
    Posts: 9
    Joined: 09/04/2019

    As I pointed out in my previous post, Schedule SE explicitly directs you multiply your business profits by 92.35%. This is to level the playing ground with W-2 employees. A W-2 employee’s FICA taxes are based on their W-2 Box 1 wages. The employer is paying FICA on that amount. However, a self-employed individual is both employer and employee and pays both halves as SE taxes. So the base for calculating SE taxes is reduced by 7.65%. Note: It is 92.35% even if you are only subject to Medicare SE taxes. It would be a recursive calculation otherwise and the IRS decided to simplify the calculation.

    Yes, I did have a typo of $804 -> $604 and carried that through. $60000 – $804 = $59,196. Your maximum employer contribution is $59,196 * 20% = $11,839.

    Click to expand…

    Ah.  Crystal clear now.  Thank you!!

    #243982 Reply

Reply To: Have 403(b), 401(a) and solo401(k), want to do Mega BD Roth IRA but 403(b) limiting

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