Solo 401k versus SEP IRA for spouse

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Topic Author
Tom1221
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Solo 401k versus SEP IRA for spouse

Post by Tom1221 »

Would really appreciate any advice on this:
Wife just transitioned from W2 job to 1099 job (social work). Predicted annual salary around 60k. She has a Simple IRA from previous employer. I am a W2 employee and have a work 401k and contribute to back door Roth IRA each year – if that matters.

Now that my wife will be working as an independent contractor – we were wondering which retirement account would be best for her given our situation? Solo 401K vs SEP-IRA? Our accountant advised her to just use a SEP-IRA. Also, will she need to set up an LLC?

Thanks in advance for your input!
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FiveK
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Re: Solo 401k versus SEP IRA for spouse

Post by FiveK »

Solo 401(k) Vs SEP IRA: Which Is Better? is one of many internet articles on the subject.

The Solo 401(k) plan wiki has some pros and cons.

She may but does not have to set up an LLC. The wiki article mentions some details on that subject.
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Duckie
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Re: Solo 401k versus SEP IRA for spouse

Post by Duckie »

Tom1221 wrote: Sun Aug 07, 2022 8:09 pm Wife just transitioned from W2 job to 1099 job (social work). Predicted annual salary around 60k. She has a Simple IRA from previous employer. I am a W2 employee and have a work 401k and contribute to back door Roth IRA each year – if that matters.
If you need to use the backdoor Roth method then so does she. She could open a solo 401k and roll her SIMPLE IRA into it. That would open the method for her.
Now that my wife will be working as an independent contractor – we were wondering which retirement account would be best for her given our situation? Solo 401K vs SEP-IRA? Our accountant advised her to just use a SEP-IRA.
If a sole-proprietor she could contribute up to $20,500 to her solo 401k (pre-tax or Roth) as the employEE plus up to roughly 20% of net income (pre-tax only) as the employER.

Or she could contribute to a SEP IRA up to roughly 20% of net income (pre-tax only) as the employER.

Or she could contribute to a SIMPLE IRA up to $14,000 as the employEE plus a 3% match as the employER. All pre-tax only.

Both the SEP IRA and SIMPLE IRA would get in the way of the backdoor Roth method.
Also, will she need to set up an LLC?
It's not required.
Topic Author
Tom1221
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Re: Solo 401k versus SEP IRA for spouse

Post by Tom1221 »

Many thanks for both replies. This is very helpful.

It sounds as though she would be able to contribute more with a solo 401k. And If she rolled her Simple IRA into it, she could then do the back door Roth contribution as well.
HomeStretch
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Re: Solo 401k versus SEP IRA for spouse

Post by HomeStretch »

Tom1221 wrote: Sun Aug 07, 2022 11:03 pm … And If she rolled her Simple IRA into it, she could then do the back door Roth contribution as well.
A SIMPLE IRA is eligible to be rolled over tax free to a qualified plan such as a Solo 401k after two years from date of first participation in the SIMPLE IRA.
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Tom1221
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Re: Solo 401k versus SEP IRA for spouse

Post by Tom1221 »

Great to know. Thanks.
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Duckie
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Re: Solo 401k versus SEP IRA for spouse

Post by Duckie »

Tom1221 wrote: Sun Aug 07, 2022 11:03 pm It sounds as though she would be able to contribute more with a solo 401k. And If she rolled her Simple IRA into it, she could then do the back door Roth contribution as well.
Be aware that she can only contribute up to $20,500 as the employEE total. So if she contributed to an employer plan for 2022 at her former job that amount will be part of the $20,500.

Also, if she chooses the solo 401k plan she need to open it at a custodian that allows incoming rollovers from IRAs (not all do) AND that offers a Roth solo 401k employEE option (not all do). Vanguard and E*Trade allow both. E*Trade used to be the best option but since it was acquired by Morgan Stanley things may change. Fidelity and Schwab don't offer a Roth option.
Last edited by Duckie on Mon Aug 08, 2022 3:23 pm, edited 1 time in total.
aristotelian
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Re: Solo 401k versus SEP IRA for spouse

Post by aristotelian »

Solo 401k is as good or better in virtually any situation.
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