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Question for the collective wisdom

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  •  RandomDoc 
    Participant
    Status: Physician
    Posts: 35
    Joined: 06/04/2016

    I have a family member who is a doc with a stay at home spouse. The spouse has an IRA from when she was working. He takes advantage of a Backdoor Roth IRA each year. The spouse’s IRA is sizeable enough that they don’t want to pay taxes to convert to Roth to then allow a Backdoor Roth. People have recommended for a doc to do medical questionnaires to then open an individual 401k to rollover the IRA to then be able to do Backdoor Roth IRA. Are there any common ways to do this for the stay at home spouse? I’m not referring specifically to medical questionnaires but anything that provides 1099 income. Is there a minimum you have to earn to then open the 401k? Is the ability to do the backdoor Roth IRA worth the hassle?

    Thanks

    #189008 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2510
    Joined: 01/14/2017

    I would absolutely look for something to call a business with the intent to create profit.  You need profit in order to fund it as well.

    The effect of the loss of ability to backdoor Roth depends on the marginal investment, assumed return, time period and taxation involved.  See attached spreadsheet for a basic comparison – assumes taxable account is the marginal investment, 30 year comparison, 2% yield and 20% div/cap gains rate.  You can modify the orange cells.  The published spreadsheet shows that giving yourself the ability to do the backdoor Roth today is equivalent to someone handing you nearly $15,000 in today’s dollars (Roth PV cell number).  Their call.  But I’ll take $15,000.

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    #189024 Reply
     jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1683
    Joined: 03/01/2018

    Is there a minimum you have to earn to then open the 401k?

    Click to expand…

    no

    a 401k is established by a business, so the goal should be that whatever pursuit is undertaken to earn self employment income, it should rise to the level of a business and not a hobby

    the IRS provides some guidance as to business versus hobby

    https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses

    this topic has been discussed on quite a lot of threads with debate on both sides

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

    #189029 Reply
     RandomDoc 
    Participant
    Status: Physician
    Posts: 35
    Joined: 06/04/2016

    Thanks for the responses and for posting that spreadsheet. I am curious if anyone has any specific examples of businesses that can be started to achieve this goal.

    Thanks

    #189034 Reply
    Dreamgiver Dreamgiver 
    Participant
    Status: Physician
    Posts: 574
    Joined: 03/09/2017

    Cooking, babysitting, photographing, tutoring, gardener, snow blower, pet walker, house sitter, ubering, home delivieries…

    #189036 Reply
    Liked by Vagabond MD
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2510
    Joined: 01/14/2017
    snow blower

    Click to expand…

    Say it ain’t so.

    #189040 Reply
     amphora 
    Participant
    Status: Student
    Posts: 65
    Joined: 04/20/2016

    I wouldn’t worry about the business versus hobby distinction — as long as the “business” is profitable and you don’t take any ridiculous deductions, you should be fine.

    Cooking, babysitting, photographing, tutoring, gardener, snow blower, pet walker, house sitter, ubering, home delivieries…

    Click to expand…

    Any of these would work. Even if you only earn $20 babysitting, that should go on your schedule C. Of course, you won’t be issued a 1099 for income under $600, but a 1099 isn’t required to open a solo 401k.

     

    This thread covers the topic well. Read WCI’s comments on opening a solo 401k.

    Can I set up an individual 401K just to roll over my IRAs

    #189044 Reply
    Liked by Vagabond MD

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