Leaving Megacorp, becoming self employed. looking for advice

[meekie]

After 19 years, I’m finally leaving megacorp on 3/2/2015! I’ve started up my own business, it’ll be small, hopefully no employees, something I can work at with a flexible schedule, and the work is fun. It hasn’t been 2 months yet, and I’m already grossing about $600 a week, net about $400 without subtracting one time costs. Might be able to grow into grossing about $2000 a week in a year or so. Any money made with the business will either go back into the business, or can be saved for retirement.

DH is continuing to work. His salary (110k) will cover our current spending. We’re up to 1.5m of our 2.5m goal, our retirement spending is estimated at 80k per year.

I have about 500k in my 401k. DH has 265k in a rollover IRA, and 110k in his 401k. We do have 250k in an after tax account. Roth’s total 80k. Megacorp stock and a few CD’s make up the rest.

I’ll be 40 this year, and DH will be 44. We are hoping to be able to retire in 4-10 years, so we need to work on getting access to more of our money.

I was planning on doing some backdoor Roth conversions, is that a good idea in my situation? If so, do I roll my 401k over into an IRA now? or should I use DH’s accounts since they’re smaller?

What should I be looking into for self employed retirement accounts?

 

[MBAustin]

Congratulations, meekie! Sounds like you've found a perfect transition from Megacorp to ER.

I'm not an expert on your specific financial questions so I'll leave that to the more knowledgeable around here.

One thing you didn't mention is how much of your total is Megacorp stock - if it's significant (or even if it isn't and you don't like the idea of holding an individual stock for the long term) you may want to sell some or all of it sooner rather than later, either for diversification or for simplification. Just something to think about.

 

[2017ish]

...
DH is continuing to work. His salary (110k) will cover our current spending. We’re up to 1.5m of our 2.5m goal, our retirement spending is estimated at 80k per year.

I have about 500k in my 401k. DH has 265k in a rollover IRA, and 110k in his 401k. We do have 250k in an after tax account. Roth’s total 80k. Megacorp stock and a few CD’s make up the rest.

I’ll be 40 this year, and DH will be 44. We are hoping to be able to retire in 4-10 years, so we need to work on getting access to more of our money.

I was planning on doing some backdoor Roth conversions, is that a good idea in my situation? If so, do I roll my 401k over into an IRA now? or should I use DH’s accounts since they’re smaller?

...

CONGRATS! Sounds like a good move for you.

Re the Roth Conversions, I don't know that the numbers are compelling for you to do so at this time (although tax diversification would be enhanced). You are going to be making at least 160K annually between your business and DH's job (rounding for ease of calculation). That is twice what you plan to spend in retirement. Seems like your marginal rates would be lower at that time for conversion purposes.

Wouldn't it be better to wait and do annual conversions of, say, 80K in retirement each year? You can live off the after-tax assets, which will grow and provide enough money to live on for five years at a low tax rate. While living off the after-tax, do a conversion each year beginning in first retirement year. After five years, you would withdraw the principal of the initial conversion penalty free and go from there in a manner akin to a CD ladder .... (Assuming no relevant tax law changes!)

This is generally what we plan to do, as our marginal bracket is too high to convert when we are working....

 

[Animorph]

If you may want to do backdoor Roth contributions, you don't want to have any traditional IRA's (in your name). That causes tax problems, since your tax basis will be proportional to all your IRA assets.


You can do Roth conversions any time, and it may be easier from a tIRA. Strictly a matter of tax planning, getting assets out of your tIRA at the lowest tax cost over your lifetime. Might not be worth it until your DH retires and your income is very low for quite a few years.


My favorite retirement account for self employeds is a Solo (or Individual) 401k. Just like at work, with an extra profit sharing component. Most major discount brokers will have something you can set up. You can simultaneously set up a Roth 401k if you would like a choice. I have both at E*Trade, with access to all their normal fund network and ETF's. Kind of a shame you can't do that normally and have your employer just direct your 401k contributions to your private account.

 

[daylatedollarshort]

My husband worked on our home businesses, too, so he could contribute to his 401K plan at megacorp as well as our business retirement plan up to the legal maximum. I think if you are married and co-owners you can still do a solo 401K, though I don't have a solo, so verify this from other sources (see Self employment: Individual 401(k)s - Ultimate Guide to Retirement). The limits for some of the plan types are here:

https://www.fidelity.com/retirement-ira/small-business/compare-plans

"Employers may contribute up to 25% of compensation3 up to a maximum of $53,000. Total employer/employee contributions cannot exceed $53,000."

But that may potentially be per spouse depending how your business is set up (less contribution made at the corporate 401K) for a total of $106K.

Plus, if your husband is able to work for your home business, his total combined income with the home business and W2 income above the SS max cutoff limit might not be subject to SS taxes.

And don't forget to look at all the small business tax deductions besides retirement accounts:

ROI: How to Avoid Paying Income Taxes - WSJ

Roth conversions might be right for you. We personally didn't do much with Roths early on for the reasons the posters mentioned above - we figured our taxable income in ER and R will likely be in lower tax brackets than they were in our peak earning years.

It sounds like a great ER plan. Good luck!

 

[meekie]

Thanks so much!!
MBAustin - been diversifying for a few years now, been moving the money over to our after tax account. Will continue, but probably keep a nice chunk in stock, still confident in the company.
2017ish - That's a great point. I was looking at the drop from 200k to 160k and thinking it might be a good time, but you're right that we should have plenty of time after DH retires.
Animorph - thanks, I was getting confused about conversion and contributions.
Animorph/daylatedollarshort - Solo 401k sounds awesome! Thanks for the info. DH will be helping me out, especially if we get over 50k, so that'll be great.

Thanks for the support! It feels like I'm jumping off a cliff, so it helps to know what I'm getting into!

 

[Sunset]

Vanguard also offers a small business solo 401K (both pretax and Roth type).
Also shows other options, although for you it probably makes sense to do the Solo 401K

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