What to do when 401k isn't offered?

[Mama Bear]

My husband and I are joining new company that won't have a 401k plan available until January 2015.

Our combined income will be $270k, so a Roth won't work. We can still max the traditionals, but I can't find much else for tax-deferred options to cover us for 6 months and reduce our income since we've had a crazy year for income. We do have three LLCs but I'm still researching to see if we can do a Simple IRA with those or some how utilize them for tax deferral money for retirement.

Anyone had a similar situation? if so, what did you do?

 

[Alan]

The income limit on ROTH contributions is silly since it is easy to do a "backdoor" ROTH which anyone can do regardless of income.

Immediately after maxing your traditional IRA's do an IRA to ROTH conversion.

 

[Mama Bear]

Can I still do a Roth conversion even if we already have Roths? Both of us have Roths and traditional IRAs. I need to study up on what the rules for that are as I thought we couldn't do that. If I'm wrong, then technically we can convert a traditional to a Roth each year?

 

[Alan]

Can I still do a Roth conversion even if we already have Roths? Both of us have Roths and traditional IRAs. I need to study up on what the rules for that are as I thought we couldn't do that. If I'm wrong, then technically we can convert a traditional to a Roth each year?

Yes you can and there is no limit to how much you convert.

Every year I convert some money from an existing traditional IRA to an existing Roth IRA. the amount I convert depends on the amount of tax I am prepared to pay that year.

 

[Alan]

Note when you do a conversion the amount of tax you pay is dependent on the total of your existing tIRA's.

eg if you have $50k in tIRA's of which $40k are contributions then you will owe future tax on $10k so if you contribute $5k to an IRA this year and immediately convert it to Roth then you will have some tax to pay.

Approx calculation is that $5k would then be 1/11th of $55k so 1/11th of the $5k is taxable (I may well have that a little wrong, but you get the general idea)

Gotta love the IRS rules....

 

[rbmrtn]

If you hold other IRA accounts you need to be aware of the pro-rata rules for conversion. It may impact your tax situation.

FPC Investment Advisory, Inc. | Misconceptions About Backdoor Roth IRA Conversions

 

[Alan]

If you hold other IRA accounts you need to be aware of the pro-rata rules for conversion. It may impact your tax situation.

FPC Investment Advisory, Inc. | Misconceptions About Backdoor Roth IRA Conversions

Good article

 

[MooreBonds]

We do have three LLCs but I'm still researching to see if we can do a Simple IRA with those or some how utilize them for tax deferral money for retirement.

What is the approximate $ from your LLC for 2014, and subsequent years? Could make sense to keep doing an individual 401k on your LLC income and skip the 401k at work if the investment choices are sub-par (quite possible, given the average person picking investment plans at work in a 401k).

Anyone had a similar situation? if so, what did you do?

Do you already have Health Savings Accounts? You can contribute up to over $6,000 as a couple if you have a family plan (or two individual plans) with a high deductible. This contribution is fully deductible on your 1040 regardless of income. If you withdraw it for approved healthcare expenses, it's FULLY TAX-FREE. If you simply let it accumulate in the account, you can withdraw it after age 65 without penalty, but still owe income taxes on it if yo don't have receipts for a qualifying medical expense to offset it. You can invest it at a number of brokers, depending on the bank that holds your account.

 

[samclem]

Could make sense to keep doing an individual 401k on your LLC income and skip the 401k at work if the investment choices are sub-par (quite possible, given the average person picking investment plans at work in a 401k).

+1. The amount you can put into an individual 401k (aka "solo 401k") is substantial. If your LLC incomes are a significant part of your income and you have no other employees than the two of you, this can be a great way to go.

 

[pb4uski]

Can I still do a Roth conversion even if we already have Roths? Both of us have Roths and traditional IRAs. I need to study up on what the rules for that are as I thought we couldn't do that. If I'm wrong, then technically we can convert a traditional to a Roth each year?

While you can do Roth conversions, I would think that Roth conversions are NOT a good idea as your income is high and your marginal tax rate will be high as well, so any $$$ you convert will increase your taxes (federal and state). The time to do Roth conversions is when you tax rate is lower than what it was when you made the 401k contributions.

 

[Alan]

While you can do Roth conversions, I would think that Roth conversions are NOT a good idea as your income is high and your marginal tax rate will be high as well, so any $$$ you convert will increase your taxes (federal and state). The time to do Roth conversions is when you tax rate is lower than what it was when you made the 401k contributions.

She did say that she already has tIRA's so if the basis is high then I would consider doing some conversions since the tax would only be on the growth, but I agree that it may not be worth it if the taxable portion of IRA's is high.

In my case once I had maxed out 401k contributions I did do tIRA contributions as opposed to putting it all into regular savings. (backdoor Roth conversions didn't exist back then so I didn't have that option to consider).

 

[Mama Bear]

Thanks for the information.

We don't have 401Ks yet through our LLC, but are looking at this as a possibility. So this may push it a bit.

As for an HSA...we had that but lose it since we're switching companies. The new company does an HRA instead, so I think I lose out on the HSA contribution option. Unless I can somehow finagle that to my advantage, but I have a feeling that won't work.........

 

[pb4uski]

If you're high income W-2 employees with no 401k or HSA then you just sit there and pay through the nose (been there, done that).

 

[samclem]

We don't have 401Ks yet through our LLC, but are looking at this as a possibility. So this may push it a bit.

If you are the only employees, these are very easy to set up (Vanguard or Fidelity can both make it easy, as well as many other companies). Deadline for setting one up for a particular year is the end of the calendar year, not your filing deadline (unlike an IRA). So, don't wait too long if you choose to go this way.

 

[growing_older]

Or for six months you just diversify a bit and build up some additional taxable accounts. In the long run, having some investments with taxable accounts is useful for managing what to take as income from the tax deferred accounts, so you can start building such a position in relatively tax efficient funds.

 

[travelover]

Or for six months you just diversify a bit and build up some additional taxable accounts. In the long run, having some investments with taxable accounts is useful for managing what to take as income from the tax deferred accounts, so you can start building such a position in relatively tax efficient funds.

One option is to invest in stocks that don't pay any dividends, in a taxable account. Berkshire Hathaway is an example.

 

[LOL!]

If you do start a 401(k) for your self-employed work, be sure that you can rollover your traditional IRAs into that 401(k). The reason to do this is that then you can do backdoor Roths going forward without worrying about the pro-rata rule with tIRAs. Those tIRAs will be gone (rolled into the 401(k)s), so they will not interfere with the backdoor Roths.

Anyways, at that income level in the future, one's 401(k)s will be maxed out and one will have a joint taxable account invested tax-efficiently for the rest of your investments. Presumably, you already have one of those, right?

 

[samclem]

If you do start a 401(k) for your self-employed work, be sure that you can rollover your traditional IRAs into that 401(k). The reason to do this is that then you can do backdoor Roths going forward without worrying about the pro-rata rule with tIRAs. Those tIRAs will be gone (rolled into the 401(k)s), so they will not interfere with the backdoor Roths.

Ohh, very nice. Also, if the OP believes they'll want to start withdrawing from the individual 401K before 59 1/2 YO, it might be worth it to look for an individual 401K plan that specifically allows withdrawals without penalty at age 55 if employment is terminated (as permitted under the law, if the plan document allows it).

 

[dallas27]

You should open 2 401ks inside your llcs, i would open 2 in each so you can maximize the 25% gross pay match.