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solo 401k and sep ira confusion

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  • Avatar umdoctor09 
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    Status: Physician
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    I’m a long time reader of WCI, but first time poster. I’ve read through the solo 401k/sep articles on the website along with the forums.

    I just had some confusion regarding my situation. I am an employed doc, max out my 401k and 457. My wife is also an employed doc and she also does the same with her 401k. We get call pay for other hospitals in town, that equates to a good 50k in 1099 income. My accountant last year told me that I could open an SEP IRA (as we were already in CY 2018).

    My question/confusion is this, I already contribute 19k this from my employee portion of my 401k. With my 1099 income I can only contribute the employer contribution if I did a solo 401k?

    Thank You.

     

    #204468 Reply
    jfoxcpacfp jfoxcpacfp 
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    Yes, that is correct. This blog post may be helpful as it explains the steps to take if you didn’t open your solo-k prior to 2019. Your accountant was right, iow, and made a helpful suggestion.

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

    #204479 Reply
    Faithful Steward Faithful Steward 
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    Joined: 06/12/2017
    My question/confusion is this, I already contribute 19k this from my employee portion of my 401k. With my 1099 income I can only contribute the employer contribution if I did a solo 401k?

    Yes, you can only do employer contribution.

    If you want to do Backdoor Roth, the SEP is problematic. Solo 401(k) would be preferable for 2019 and beyond. If you are still doing contributionfor 2018, do the SEP and then roll it into your new Solo 401(k).

    You should be doing Backdoor Roth’s. The fact that your accountant doesn’t seem familiar with these strategies should raise a red flag.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    http://www.fswealthadvisors.com | (717) 496-0900

    #204481 Reply
    CordMcNally CordMcNally 
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    Status: Physician
    Posts: 1874
    Joined: 01/03/2017

    Yes, that is correct. This blog post may be helpful as it explains the steps to take if you didn’t open your solo-k prior to 2019. Your accountant was right, iow, and made a helpful suggestion.

    Click to expand…

    Nice to see that all accountants aren’t bad out there! 😉

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #204492 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3399
    Joined: 01/08/2016
    I’ve read through the solo 401k/sep articles on the website along with the forums.

    Click to expand…
    With my 1099 income I can only contribute the employer contribution if I did a solo 401k?

    Click to expand…

    yes, that is what you read.

    #204498 Reply
    Liked by Tim, spiritrider
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7161
    Joined: 01/09/2016
    I’ve read through the solo 401k/sep articles on the website along with the forums

    Click to expand…
    With my 1099 income I can only contribute the employer contribution if I did a solo 401k?

    Click to expand…

    yes, that is what you read.

    Click to expand…

    @peds, you’ve done it again – I didn’t say that. Guess I need to work extra harder to stay on your “nice” side.

    Actually, to get there 😉

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

    #204613 Reply
    jfoxcpacfp jfoxcpacfp 
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    Yes, that is correct. This blog post may be helpful as it explains the steps to take if you didn’t open your solo-k prior to 2019. Your accountant was right, iow, and made a helpful suggestion.

    Click to expand…

    Nice to see that all accountants aren’t bad out there!

    Click to expand…

    Nah, not even close. It’s like all news stories – we don’t hear the good stuff, not as interesting.

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

    #204614 Reply
    Liked by Tim
    Avatar umdoctor09 
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    Status: Physician
    Posts: 2
    Joined: 04/06/2019

    So if I understand correctly, my work 401k and my solo 401k can be only 19k combined? I guess I’m confused cause if that’s the case then the sep would be better with rollovers

    #206390 Reply
    jfoxcpacfp jfoxcpacfp 
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    Joined: 01/09/2016

    So if I understand correctly, my work 401k and my solo 401k can be only 19k combined? I guess I’m confused cause if that’s the case then the sep would be better with rollovers

    Click to expand…

    You can contribute only $19k as an employee contribution across all retirement accounts. You can contribute an additional $56k to your solo-k, same as with a SEP. Both are calculated at 20% of net profits. The big difference is that you’ll pay pro-rata tax on Roth conversions if you have a SEP balance at 12/31 of the year you convert, but you will pay no pro-rata tax if the account is a solo-k.

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

    #206393 Reply
    Avatar CFEonline 
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    Status: Physician
    Posts: 89
    Joined: 09/05/2018

    If you are maxing out your employer 401k you won’t have any leftover elective deferrals for the 1099 retirement account, that is correct.

    I am not sure if you could profit share more into a solo401k or sep-ira

    If you setup a custom plan document your solo 401k can take additional contribution beyond the profit sharing. This would be the mega backdoor Roth. You would setup for after-tax non Roth contributions (can go up to ~$56k total in the solo 401k and not subject to % of income like profit sharing) then you convert to Roth and rollover to your Roth IRA.

    #206525 Reply
    Avatar 8arclay 
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    Status: Physician
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    Joined: 01/30/2019

    Somewhat related, I had a question about my wifes income. Has a 401K but wont be making enough to max it out this year (very part time).

     

    Also does 1099 work. Say she earns and contributes $10k to the 401k from the employed position, while also earning $5k or so from 1099 work. Can she contribute 100% of the 1099 income to a solo 401K? Or is she still restricted to the roughly 20% of 1099 income to solo 401k?

    #206566 Reply
    Avatar Peds 
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    Joined: 01/08/2016

    20% is just for employer

    #206567 Reply
    Liked by spiritrider
    jfoxcpacfp jfoxcpacfp 
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    Earnest refinancing bonus

    Somewhat related, I had a question about my wifes income. Has a 401K but wont be making enough to max it out this year (very part time).

     

    Also does 1099 work. Say she earns and contributes $10k to the 401k from the employed position, while also earning $5k or so from 1099 work. Can she contribute 100% of the 1099 income to a solo 401K? Or is she still restricted to the roughly 20% of 1099 income to solo 401k?

    Click to expand…

    Yes, she can contribute up to $9K to a solo-k, limited to her [net profit – 1/2 FICA tax]. After that, it goes down to the 20% profit-sharing formula, which won’t apply in her situation. Be sure to set up the solo-k before the eoy, even if she doesn’t fund it until you get your taxes finalized. Otherwise, you’ll be stuck with a SEP using the 20% formula.

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

    #206568 Reply
    DMFA DMFA 
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    Status: Physician
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    Joined: 06/24/2016

    Employee elective deferrals – $19,000 *combined* across all qualified defined contribution plans, aka §402(g) limit

    Total contributions (including employee elective deferrals, employee after-tax if plan allows, and employer match/profit-sharing/non-elective) – $56,000 *per* unrelated employer, aka §415(c) limit

    Total employer contributions for self-employed: 20% of net profit after deducting half of self-employment tax (NPADHSET).  This is regardless of the amount contributed as elective deferral; for example, if NPADHSET is $23,750, you can still contribute up to that amount if you’ve made no elective deferrals elsewhere, e.g. $19,000 in employee elective deferrals and (23,750/5) = $4,750 in employer contributions.

    A SEP-IRA is considered a qualified defined contribution plan for purposes of §415(c). I know SEP-IRA says 25%, but that’s of compensation not net profit; it’s still 20% contribution, 80% compensation.  SEP-IRA can be opened “late,” 401(k) can’t since it can’t be effective prior to January 1 of the current year.

    So, for example, if net profit was $50,000, then assuming she maxed SS tax at her employer (i.e. made > $128,400 in 2018), then self-employment tax is 50,000 * 0.9235 * 0.029 = $1,339, and max employer contribution is (50,000 – [1339 / 2]) * 0.20 = $9,866.  If it’s a SEP-IRA, or if it’s a 401(k) and she maxed elective deferrals elsewhere, then that’s all she can contribute.

    If it’s a 401(k), and she did not max elective deferrals up to the §402(g) limit, then she could still make elective deferrals to the 401(k) if it was effective when the money was earned, up to a combination of the §402(g) limit (across all accounts) and the lesser of the §415(c) limit or NPADHSET.

    …now, just to make things fun and more complicated, if you have a custom plan which allows for after-tax contributions (non-Roth, aka NRATs), then since those are neither elective deferrals (limited by the §402(g) limit) nor employer contributions, you can use those to get up to the lesser of “compensation” or the §415(c) limit.  However, be aware that employer contributions reduce this amount by *twice* their value, since they both reduce compensation for purposes of §415(c) and count as contributions toward it.  For example, someone who made $50,000 NPADHSET contributed $19,000 in elective deferrals and $10,000 as an employer could only contribute another $11,000 since compensation is reduced to $40,000, and she had already contributed $29,000 to the plan, since contributions of all kinds cannot exceed compensation.  One could then move the NRATs to Roth 401(k) using an in-plan Roth rollover or to Roth IRA with a non-hardship in-service withdrawal.

    …clear as mud?

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

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

    #206603 Reply
    Liked by childay
    Avatar ANWCI 
    Participant
    Status: Physician
    Posts: 17
    Joined: 02/25/2018

    Employee elective deferrals – $19,000 *combined* across all qualified defined contribution plans, aka §402(g) limit

    Total contributions (including employee elective deferrals, employee after-tax if plan allows, and employer match/profit-sharing/non-elective) – $56,000 *per* unrelated employer, aka §415(c) limit

    Total employer contributions for self-employed: 20% of net profit after deducting half of self-employment tax (NPADHSET).  This is regardless of the amount contributed as elective deferral; for example, if NPADHSET is $23,750, you can still contribute up to that amount if you’ve made no elective deferrals elsewhere, e.g. $19,000 in employee elective deferrals and (23,750/5) = $4,750 in employer contributions.

    A SEP-IRA is considered a qualified defined contribution plan for purposes of §415(c). I know SEP-IRA says 25%, but that’s of compensation not net profit; it’s still 20% contribution, 80% compensation.  SEP-IRA can be opened “late,” 401(k) can’t since it can’t be effective prior to January 1 of the current year.

    So, for example, if net profit was $50,000, then assuming she maxed SS tax at her employer (i.e. made > $128,400 in 2018), then self-employment tax is 50,000 * 0.9235 * 0.029 = $1,339, and max employer contribution is (50,000 – [1339 / 2]) * 0.20 = $9,866.  If it’s a SEP-IRA, or if it’s a 401(k) and she maxed elective deferrals elsewhere, then that’s all she can contribute.

    If it’s a 401(k), and she did not max elective deferrals up to the §402(g) limit, then she could still make elective deferrals to the 401(k) if it was effective when the money was earned, up to a combination of the §402(g) limit (across all accounts) and the lesser of the §415(c) limit or NPADHSET.

    …now, just to make things fun and more complicated, if you have a custom plan which allows for after-tax contributions (non-Roth, aka NRATs), then since those are neither elective deferrals (limited by the §402(g) limit) nor employer contributions, you can use those to get up to the lesser of “compensation” or the §415(c) limit.  However, be aware that employer contributions reduce this amount by *twice* their value, since they both reduce compensation for purposes of §415(c) and count as contributions toward it.  For example, someone who made $50,000 NPADHSET contributed $19,000 in elective deferrals and $10,000 as an employer could only contribute another $11,000 since compensation is reduced to $40,000, and she had already contributed $29,000 to the plan, since contributions of all kinds cannot exceed compensation.  One could then move the NRATs to Roth 401(k) using an in-plan Roth rollover or to Roth IRA with a non-hardship in-service withdrawal.

    …clear as mud?

    Click to expand…

    This is interesting.

     

    Do the custom plan you mentioned in the last paragraph have to be piggybacked to the existing individual 401K or can be a separate account with perhaps another institution?

    I have an individual 401K that I’ve contributed with pre-tax money but want to get the rest of $56,000 into a Roth account if possible.

    #206612 Reply

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