Independent Contractor Roth IRA?

[Mo Money]

I retired at the end of February 2015. Right before I retired, I made a backdoor 2015 Roth contribution -- the maximum allowed for 2015.

After ER, I did some 2015 independent contractor work for my former law fi*m. That IC w*rk will continue for a portion of 2016. Please note that some of my 2015 time was paid to me with a check issued January 2, 2016.

I have a Roth IRA at Schwab, as well as a traditional IRA. In 2015 I rolled all w*rk retirement accounts into those IRAs.

Question 1: For 2016, may I make a Roth contribution equal to the IC income I earn in 2016, up to the 2016 max of $6500? (I am over 50.)

Question 2: Can I contribute directly to the Roth, or do I have to do the backdoor Roth routine once again?

Question 3: Since I was paid by check dated January 2, 2016 for two months of 2015 IC w*rk, can I put that money in my Roth as part of my 2016 Roth contribution?

Thanks in advance for any wisdom on these issues.

 

[Senator]

When will you get the 1099 or W2? If it is a 2016 1099, or you claim the income for 2016, you can contribute to a 2016 Roth.

You can also do any backdoor Roth conversions. Those contributions will be unaffected.

Assuming you are on a cash accounting basis, not accrual.

 

[Fedup]

I wouldn't do a backdoor if you have an existing IRA because of tax complication. I would do a Roth IRA if you are under the limit.


Sent from my iPad using Early Retirement Forum

 

[Sunset]

As a non employee, you are an employer of yourself.

So you can open a Vanguard solo 401K Roth (or IRA or both) Account now for the tax year 2016. You missed the 2015 tax year as it has to be opened within the tax year initially.

What you then get is the ability to contribute $23,000 (including catch up amount) to the ROTH 401K and 25% of after expense money you were paid which can go as "employer" contribution into the IRA 401K account and is deductible.

The max limit is ~$53K in total per year.

Plus you still get to do your own Roth contribution of $6,500 /yr for yourself and $6,500 /y for your spouse if you have one.

https://investor.vanguard.com/what-we-offer/small-business/individual-401k

 

[ziggy29]

It's not clear to me whether or not you are a self-employed for tax purposes in this endeavor. If I'm a self-employed independent contractor, I'd be looking more at a SEP IRA or a solo 401K, not a vanilla Roth IRA, since those plans also reduce self-employment tax which can be a massive hit (probably about another 14% hit above and beyond income tax in a bracket low enough for a Roth to make sense).

Obviously, if you had enough self-employment income to max out a solo 401K *and* a Roth IRA, so much the better.

If this isn't self-employment income subject to self-employment tax, then the usual rules apply, and in a low tax bracket (say 15% or less), yeah, a Roth is probably the way to go, IMO.

 

[Mo Money]

Thank you for the input -- I will look into opening a solo Roth 401K, and into contributing the statutory max to the Roth IRA.

A question for you tax gurus:

If I get a substantial 2016 payment to cover phantom income for 2015 (I worked two months as a law partner in 2015), is that phantom income payment eligible to sock away in a solo Roth 401K or Roth IRA? I am guessing that such phantom income will be documented with a 1099 now that I am an independent contractor. I suppose I "worked" for that income, since the IRS says I owe it....

 

[Senator]

If I get a substantial 2016 payment to cover phantom income for 2015 (I worked two months as a law partner in 2015), is that phantom income payment eligible to sock away in a solo Roth 401K or Roth IRA? I am guessing that such phantom income will be documented with a 1099 now that I am an independent contractor. I suppose I "worked" for that income, since the IRS says I owe it....

Even if you do not get a 1099, you can claim the income. You can make it up if you want, the IRS doesn't mind if you declare extra income.

 

[Sunset]

Thank you for the input -- I will look into opening a solo Roth 401K, and into contributing the statutory max to the Roth IRA. .

As self employed you will want also to have a solo 401K IRA for the 25% of net income considered to be employer portion as it is not eligible for contribution to the solo 401K ROTH.

Unless of course you like paying extra taxes