SIMPLE IRA & Solo 401k

Other discussions not related to the Permanent Portfolio

Moderator: Global Moderator

Post Reply
User avatar
vnatale
Executive Member
Executive Member
Posts: 5920
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

SIMPLE IRA & Solo 401k

Post by vnatale » Mon Apr 12, 2021 8:21 am

For many years I have both been an employee of a non-profit (which is owned by no one) and had my own consulting business as a self-employed sole proprietor.

In 2020 the non-profit offered a SIMPLE IRA in which I participated. I contributed $1,500 and the organization matched that amount.

Regarding retirement plan contribution limits....being over 50 years old I am eligible for the $6,500 catch up on top of the $19,500 available to all, which is a total of $26,000.

Several years ago I learned that for my own business I had to chose either the SIMPLE IRA or the Solo 401k but not both. At that point I switched from the SIMPLE IRA to the Solo 401k because it allowed me greater contributions.

However, that seems to only apply to plans through the same employer. It seems that one can participate in a SIMPLE IRA with one employer and also in a Solo 401k with a separate, unrelated employer.

For example purposes let's say I earned $50,000 in my consulting business.

I've done the calculations about five different ways and it seems that based upon that $50,000 I can contribute a total of $33,000. The first $26,000 can be any combination of traditional deductible and Roth non-deductible contributions. However, the remaining $9,000 is considered my employer contribution and can only be a deductible non-Roth contribution.

Finally, it seems that my $1,500 participation as an employee of the non-profit uses up $1,500 of my annually allowed $26,000, therefore leaving $24,500 to be contributed from my self-employment income but leaving the $9,000 employer contribution amount intact.

Though I am an accountant I am not the type of accountant that most people think of when they hear the word accountant.

The bulk of my career has been being the accounting / financial person for an organization and not preparing other peoples' tax returns. For the last eight years the only tax returns I have been preparing are my own and one other person's (whose return is much simpler than mine).

I try to learn as much as I can about any tax issue that affects me and generally ignore the ones that have no applicability to me.

This is one that I've never prior encountered for myself and anyone else.

I'm putting this all here in the off-chance that one of you has at some time been in a similar position.

At this point I'm fairly confident of the above. But I'm the type of person who will seek many confirmations and do several calculations different ways to make sure I'm always getting the same answers.

Thanks
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats."
User avatar
pp4me
Executive Member
Executive Member
Posts: 859
Joined: Wed Apr 29, 2020 4:12 pm

Re: SIMPLE IRA & Solo 401k

Post by pp4me » Mon Apr 12, 2021 9:28 am

vnatale wrote:
Mon Apr 12, 2021 8:21 am
Several years ago I learned that for my own business I had to chose either the SIMPLE IRA or the Solo 401k but not both. At that point I switched from the SIMPLE IRA to the Solo 401k because it allowed me greater contributions.
If that was the reason to choose the Simple IRA why didn't you go with SEP? That's what I was advised to do when I became an independent contractor. It had higher contribution limits.

I eventually had to re-characterize the SEP as something else when I went back to work and wanted to roll an employer 401k into it. At least that's what Fidelity told me and they did all the paperwork. At this point I don't even know what it's called but it doesn't really matter as I'm not contributing to it any more.
User avatar
vnatale
Executive Member
Executive Member
Posts: 5920
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: SIMPLE IRA & Solo 401k

Post by vnatale » Mon Apr 12, 2021 10:34 am

pp4me wrote:
Mon Apr 12, 2021 9:28 am

vnatale wrote:
Mon Apr 12, 2021 8:21 am

Several years ago I learned that for my own business I had to chose either the SIMPLE IRA or the Solo 401k but not both. At that point I switched from the SIMPLE IRA to the Solo 401k because it allowed me greater contributions.


If that was the reason to choose the Simple IRA why didn't you go with SEP? That's what I was advised to do when I became an independent contractor. It had higher contribution limits.

I eventually had to re-characterize the SEP as something else when I went back to work and wanted to roll an employer 401k into it. At least that's what Fidelity told me and they did all the paperwork. At this point I don't even know what it's called but it doesn't really matter as I'm not contributing to it any more.


Way back in the late 80s I started with a Money Purchase Plan.

Then in the early 2000s Vanguard said I had to convert it to a SEP.

I kept contributing to the SEP until I realized I could do a larger contribution using a SIMPLE IRA rather than the SEP.

Finally, I had my final realization that for my circumstances I'd be able to contribute most of all using the Solo 401k.

It all depends on your individual circumstances. Since in all those years my income as an employee was high while my self-employment income was not as high...my circumstances pointed to currently the Solo 401k being the best option.

Plus SIMPLE IRA does not allow Roth contributions. I seem to remember that SEP's also do not allow Roth contributions? But's it's been almost 10 years since I investigated their attributes.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats."
User avatar
vnatale
Executive Member
Executive Member
Posts: 5920
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: SIMPLE IRA & Solo 401k

Post by vnatale » Mon Apr 12, 2021 10:50 am

vnatale wrote:
Mon Apr 12, 2021 10:34 am

pp4me wrote:
Mon Apr 12, 2021 9:28 am

vnatale wrote:
Mon Apr 12, 2021 8:21 am

Several years ago I learned that for my own business I had to chose either the SIMPLE IRA or the Solo 401k but not both. At that point I switched from the SIMPLE IRA to the Solo 401k because it allowed me greater contributions.


If that was the reason to choose the Simple IRA why didn't you go with SEP? That's what I was advised to do when I became an independent contractor. It had higher contribution limits.

I eventually had to re-characterize the SEP as something else when I went back to work and wanted to roll an employer 401k into it. At least that's what Fidelity told me and they did all the paperwork. At this point I don't even know what it's called but it doesn't really matter as I'm not contributing to it any more.


Way back in the late 80s I started with a Money Purchase Plan.

Then in the early 2000s Vanguard said I had to convert it to a SEP.

I kept contributing to the SEP until I realized I could do a larger contribution using a SIMPLE IRA rather than the SEP.

Finally, I had my final realization that for my circumstances I'd be able to contribute most of all using the Solo 401k.

It all depends on your individual circumstances. Since in all those years my income as an employee was high while my self-employment income was not as high...my circumstances pointed to currently the Solo 401k being the best option.

Plus SIMPLE IRA does not allow Roth contributions. I seem to remember that SEP's also do not allow Roth contributions? But's it's been almost 10 years since I investigated their attributes.

I also seem to remember that the Solo 401k has only been an option for not that long? Maybe over the last decade?
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats."
Post Reply