Backdoor Roth IRAs are a frequently-discussed topic on physician blogs and social media sites. But most conversations assume you understand basic investing concepts that many novice investors don’t. I’ve written this post as a reference guide for anyone who needs help with the mechanics on how to set up a backdoor Roth IRA. Continue reading
It happens every year:
- Doctor is being paid by 1099 for extra shift work or locums.
- Doctor is covered for retirement at her day job – doesn’t know a 2nd plan may be an option.
- Doctor is looking for ways to reduce her income while filing her taxes.
- Doctor finds White Coat Investor – in July!
If a similar situation has happened to you, don’t despair! You can still fund a solo-k via the back door.
- Open a SEP IRA account in the current year for the prior year. You have until the due date of your income tax return, including extensions (October 15 for individuals), to do this.
- Contribute 20% of net profits from your IC work (less ½ FICA taxes) to your SEP. This deadline with an extension is also 10/15 if you file for extension.
- Open a solo-401k account.
- Roll the SEP balance into the solo-401k account.
- Close the SEP account and contribute to the solo-401k in the current and future years.
And there you have it – you have just funded your new solo-k via the “back door”. We’ve used these steps to ensure physician business owners have that solo-k space even when they become clients after year-end. Below are some questions about this technique that pop up on the WCI forum and from new clients…
Will I have to pay pro-rata taxes? After all, a SEP is an IRA!
No, as long as you close the SEP and transfer the balance into the solo-k before 12/31. Or you can wait until the following year to make the backdoor conversion and close the SEP in the following year. Remember, you owe pro-rata taxes only if you have an IRA balance on 12/31. An IRA balance on any other day of the year is irrelevant.
What if I’ve already filed my income tax return without the SEP?
As long as it’s October 15 or earlier, you can amend your income tax return for the SEP contribution.
Do I have to make the SEP contribution before I file my taxes?
No. If you’ve filed an extension, you can contribute to the SEP at any time before 10/15. It makes no difference in what order you file your return or contribute to the SEP.
Does the custodian matter?
This is one situation in which you should not use Vanguard. They do not allow rollovers into their 401k’s.
What if I’m not doing any IC work in the current year?
Per Title 26 Code 401(c)(B), if you have been a self-employed individual in any prior year, you are eligible to adopt a one-participant 401k. (I got this tip from @spiritrider, the most knowledgeable tax code guru on the WCI Forum.)
What if last year’s income was a one-off and I don’t plan to do IC work ever again?
A 401k needs a “business sponsor”. Should you have no plans to continue your business (as in, you’ve “closed the doors”, so to speak, and the business sponsor ceases to exist) your 401k plan must be terminated. So think carefully about your plans and goals. It wouldn’t make sense to create a solo-401k for a SEP rollover only to bump up against the requirement to roll it right back out to an IRA!
Whenever you do work for a company as an independent contractor, they should ask you to fill out a W-9. This document is used by the company to file 1099s for individuals and non-corporate entities to whom they have paid more than $600 in a calendar year. Independent contractor services include but are not limited to Continue reading
Small practices often have a lot of trouble competing for employees with large corporate entities, often because employee benefits are so expensive. Group health insurance can be especially expensive if you have even one employee in bad health or over a certain age in an otherwise young and healthy group of employees. Then, you have the problem that some employees are covered by their spouse’s plan and don’t even get to participate in that particular benefit. Sure, you can offer them a higher wage to make up for it, but then if another employee with more experience finds out, you’re likely to have a problem. So, what can you do? Continue reading
I can’t count how many discussions I’ve been involved in when clients/prospects/WCI forum readers have brought up the need to set up an LLC for their side hustle. Tax advisors seem to thrive on recommending clients use an LLC whenever a professional has a smidgeon of side income, but that may not be the correct choice. Continue reading
We searched our Vlog archives to unearth some hidden treasures. In this oldie but goodie, Johanna shares her personal success story on raising her sons to be financially independent.
It hasn’t all been success, though. In this video, Johanna refers to the post Money Mistakes I’ve Made, where she bares her soul to show that we all have a “history”.
If you’re interested in scheduling a free initial consult with us, click here (do not use the link listed in the video).
With the costs of college and other post-secondary education continually rising, clients often ask about effective methods of planning for their children’s future education costs.
Though there are several methods of planning for future education costs, one popular technique is to use a 529 plan. Continue reading
Have you been told that you can’t do a backdoor Roth IRA? It may not be as elusive as you originally thought. Check out Michelle’s vlog to see if these options fit you.
Also, read Johanna’s companion post How to Set-up a Backdoor Roth
TCJA (Tax Cuts and Jobs Act) 2017 took away employee business expenses, along with much of our ability to itemize. In particular, we can now deduct mortgage interest on only $750k of debt and are limited to a deduction of $10k/yr. for SALT deductions. On a positive note, the Pease Limitation – which reduced itemized deductions for high earners, is gone along with AMT for most high-income taxpayers. Continue reading