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Opening a Solo 401k Without Income

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  • Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3299
    Joined: 09/18/2018

    @zzz,
    Why didn’t I think of that? The genius of simplicity is amazing.
    Stop to think of it, why limit retirement savings?
    Stop to think of it, income is income so why pretax?
    Stop to think of it, why tax some classes of income like short term and long term, qualified and unqualified differently?
    Stop to think of it, why have graduated tax rates ?

    Someone always comes up with a silly reason why one should pay more and one should pay less.
    I completely support your proposals, unless they raise my taxes!

    I never understood why 401K plans and IRA’s have separate limits. Something tells me some lobbyist was highly paid. Pretty simple!

    I seriously admire your common sense.

    #236138 Reply
    MPMD MPMD 
    Participant
    Status: Physician
    Posts: 2585
    Joined: 05/01/2017

    Funny that arcane, nonsensical tax rules turn into an ethics debate. If the tax code wasn’t ridiculous, none of this would matter. Let’s step back:

    An IRA is an account which can be funded with pretax $ deducted from current income, grow tax deferred, and is taxed at normal income rates upon withdrawal.

    A solo 401k is an account which can be funded with pretax $ deducted from current income, grow tax deferred, and is taxed at normal income rates upon withdrawal.

    They’re the same thing (yes, I understand there are differences, but in terms of the tax reality of each for someone, they’re the same).

    Yet, with one I can do a backdoor Roth, and the other I can’t. That’s nonsensical. All the more nonsensical because the only reason anyone needs to do a backdoor Roth is because the rules arbitrarily state that beyond a certain income threshold, instead of directly making $6k after tax dollars tax free forever, you have to add an additional step to make $6k tax free forever. Same result, just extra paperwork.

    Instead if having multiple names with slightly different rules for essentially the same thing, countless hours could be saved by harmonizing the arbitrary rules.
    – ‘Don’t be dumb, save some money account’ — every taxpayer can put in up to $56k (inflation indexed) tax deferred annually, any combination of employee or employer contribution. Tax as income when withdrawn
    – ‘Don’t be dumb, save more money account’ — everyone can put $6k (inflation indexed) post-tax dollars annually. Never taxed again.

    No intent dilemmas.

    Click to expand…

    I very much agree with those ideas.

    In general I think the IRS should just heavily reward retirement savings of any kind. Rather than rolling things around you’d just give your employer your account # and that’s where they would place the match.

    #236186 Reply
    Liked by Tim
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1966
    Joined: 02/01/2016

    Don’t blame the IRS. The IRS simply enforces the laws congress passes. Congress passes laws to gain political advantage heavily influenced by the lobbyists of the financial industry.

    That is why we have a smorgasbord of Internal Revenue Code sections 401(a), 401(k), 402A (Roth 401k) 403(b), 408(a) (IRA) 408A (Roth IRA), 408(k) (SEP IRA), 408(p) (SIMPLE IRA), 457b, etc…

    I think there is very little chance that congress could please all the competing interests to have a unified retirement plan/

    #236219 Reply
    Avatar rsmnp1087 
    Participant
    Status: Physician
    Posts: 8
    Joined: 04/15/2019

    Call me naive, but physicians should hold themselves to a high standard of doing the right thing.

    Click to expand…

    Yet, with one I can do a backdoor Roth, and the other I can’t.

    Click to expand…

    @zzz got to the heart of the matter.

    @spiritrider, please explain where the ethics violation is here.  If one was taking surveys on their cell phone and then deducting their entire cell phone bill as a business expense, you might have a case for an ethics violation.

    But using a nominal amount of income in order to rollover (not even to GAIN more tax free space, but simply rollover) a 401k, so that a backdoor Roth contribution is still possible is immoral?  Do you really think that represents the spirit of the IRS regulations?  C’mon…you may disagree with others, but questioning their ethics is a bit much in this situation.

    #236231 Reply
    Liked by ZZZ

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