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Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. He currently leads Pure Financial Advisors along with Michael Fenison and Joe Anderson. Alan joined the firm about one year after it was established. At that time the company had less than 100 clients and approximately $50 million of assets under management. As of [...]

Published On
September 1, 2020

How do you report a backdoor Roth IRA conversion over two tax years, and is there a point at which the backdoor Roth just doesn’t make sense? Plus, more strategizing for your Coronavirus related distribution, stimulus (and possible future stimulus) tax planning, and your self-employed, small business retirement plans.

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Show Notes

  • (00:51) Is There a Point at Which Backdoor Roth Doesn’t Make Sense?
  • (07:51) How Do I Report a Backdoor Roth IRA Conversion Over Two Tax Years?
  • (15:06) Can I Take a Coronavirus Related Distribution from 401(k) and Roth 401(k) and Put it In an IRA?
  • (22:22) If We Are Married Filing Separately Are We Considered Single for $1200 Stimulus Tax Credit?
  • (24:00) Is Donald Trump Temporarily Waiving Capital Gains Tax on Real Property?
  • (26:27) Self Employed: My Spouse Has a Retirement Plan, Would My SEP-IRA Contributions be Non-Deductible?
  • (29:22) Self Employed S-Corp: Can I Contribute Both the Employer and Employee Amounts to SEP IRA and Solo 401(k), Then Convert SEP to Roth?
  • (36:38) Should I Contribute to Roth or Traditional TSP?
  • (43:02) Comment: Joe Comes On Like an Extra Spray of Cologne
  • (44:58) The Derails: More Comments

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Transcription

You’ve got a chance to win a $100 Amazon e-gift card just for telling us what you think about Your Money, Your Wealth! Between now and September 21st, click the link in the description of today’s episode in your podcast app to go to the show notes and fill out the 3rd annual YMYW podcast survey to be entered in the drawing. US residents only, no purchase necessary! Today on Your Money, Your Wealth®, more strategizing for your Coronavirus related distribution and your self-employed, small business retirement plans, plus listener comments, and Derails about comments. But first, let’s talk backdoor Roth IRA – how do you report a conversion over two tax years, and is there a point at which the backdoor Roth just doesn’t make sense? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Is There a Point at Which Backdoor Roth Doesn’t Make Sense?

Joe: Al, we got Brian writing in. Doesn’t tell us where he’s from. So he’s probably-

Al: Just have to guess.

Joe: – he’s just probably new to the show.

Al: Maybe after we get to the question, we’ll guess.

Joe: Got it. As you can tell- or maybe you don’t- but Al and I don’t read these questions prior. I think everyone knows that I don’t because I just fumble through these things. And they’re getting longer so we make it shorter because it gets super annoying listening to my stumbling over the words.

Al: They are getting longer. But then we seem to get comments they like to hear you kinda fumble through.

Joe: No, I think that’s one person. Most people hate it, I would imagine. Because I can’t even listen to it. But anyway Brian writes in “Joe and Al. Came across your podcast recently and I have become an avid listener to the episodes.” All right well welcome to the family Brian. “I prepare tax returns.” Oooh, I wonder if he’s an EA.

Al: Or CPA or a tax preparer.

Joe: “So it’s entertaining trying to decipher the tax question, coming up with an answer and having you guys confirm it. So I have a question concerning the pro-rata and aggregation calculation when doing Backdoor Roth IRA contributions. I’ve only listened to a half a dozen or so of your podcasts, so I apologize if you’ve already answered this question. I’ve got at least 20 years until retirement, so I don’t anticipate being able to make direct contributions to a Roth IRA.” So Brian’s making the big bucks.

Al: He’s up there.

Joe: He’s killing the game.

Al: That tax preparation business.

Joe: He’s probably got a big wallet like Big Al.

Al: You think I have a big one, don’t ya?

Joe: You have a large wallet. And that question came off a little weird. “Number 1, is there a percentage where the pro-rata aggregation is so high that you would not recommend the Backdoor Roth IRA contribution? If I understand the pro-rata calculation, I’m figuring I have to recognize that taxable income 90% or more on a $6000 back to a Roth IRA contribution. I have over $54,000 in rollover IRA. I’ve been effectively paying taxes twice on the– I’d be effectively paying tax twice on the contribution money. My current employer has a simple IRA plan which I’m maxed out but since I used to the $18,000 401(k) contribution I feel I’m not saving as much as I used to and worried.” Did you understand that question?

Al: Well let’s just go with the first one.

Andi: He said he was used to the $18,000 401(k) contribution so now he feels like he’s not saving as much.

Al: I think his first question- let’s just focus on that. “Is there a percentage where the pro-rata aggregation is so high that you would not recommend the Backdoor Roth IRA contribution?”

Joe: The answer is no, in my opinion.

Al: I don’t look at it as a percentage either. You got to look at the whole circumstances.

Joe: Here, this is how I look at it and you can correct me if I’m wrong. If I am making a Roth IRA contribution no matter what tax bracket, let’s just say there was no AGI limitation on Roth IRA contributions. Right now if you make over $200,000 roughly, adjusted gross income, as a married couple you cannot make a direct Roth IRA contribution; if you make more than $130,000 roughly as a single person, you cannot make a Roth IRA contribution. So what people are doing is they’re making an IRA contribution, they’re not taking the deduction. So it’s already an after-tax contribution. They’re putting it into an IRA. They’ve already paid taxes on the money. And then from there, they’re converting it into a Roth IRA because it has basis; there’s no tax and now it will grow 100% tax-free. So let’s assume I’m in the 37% tax bracket and I do a Backdoor Roth IRA contribution. So I want to go IRA, put it in, convert it, no taxes due. If I decide not to do a Backdoor Roth contribution because they changed the law, they said anyone’s available to do a Roth IRA contribution at any income. So I’m in the 37% tax bracket. I’m going to put my $6000 directly into a Roth. Where the question- I’m paying 37% regardless. It’s after-tax at 37%. I’m using a loophole to get it into the Roth.

Al: Correct.

Joe: Or I’m just putting it directly into the Roth. Where the pro-rata rule comes into effect is that there’s a portion of the dollars that if I already have basis in it, so let’s say in this case I put $6000 in but $3000 is pre-tax, $3000 is after tax. So my pro-rata is 50%; 50% would be taxable, 50% would be non-taxable. I put the $6000 in once and I convert it. I pay tax on $3000. People are gonna pay tax on those dollars regardless as the thing leaks out. So the pro-rata rule- you still want to get money into the Roth, so if it’s 90% taxable versus 50% versus zero, I’m still paying the 37%. It doesn’t matter in my opinion.

Al: But she might be in a lower bracket in retirement and especially if you’re close to retirement, you might wait on that. I mean we’ve had people that have $54,000 or so in an IRA. And just because the tax rates are lower right now we’ve had them convert the whole amount like now. And then they can do Backdoor Roths from now till forever. Because they don’t have any other IRAs. Or in a case like this Brian, if you’ve got a 401(k) with your employer you could potentially roll that IRA into the 401(k) and then you can do this without worrying about the pro-rata rule. Because 401(k) investments are not counted in the pro-rata rule. But honestly, it depends on the circumstance. We’ve had lots of cases where the pro-rata rule, very little of it was tax-free on the conversion. We still did it because it made sense in their overall situation.

Joe: I’m just saying if it’s taxable or tax-free to do- if people are getting too caught up in the pro-rata rule. I think there’s probably deeper calculation because he’s feeling he’s going to get double taxed.

Al:  And that’s actually a good point and there’s no way you get double taxed. And if you work out the math you’ll follow what I’m saying and that is you can’t get double taxed. This is rigged to make sure you don’t get double taxed.

Joe: Yes, exactly. That was my point. It’s like if you run the numbers out further enough you will realize you’re not going to get double taxed. You might feel like at that moment, but-

Al: It feels because he kinda- he did it after-tax contribution then he converted and stuff that was taxable. It just means it reduces your IRA. So it’s less to pay tax on later.

Joe: Right. And you’re just adding more basis, but the basis has to come out pro-rata. So if you convert the whole thing, you’re not going to be double taxed. There’s still going to be basis within the overall IRA.

How Do I Report a Backdoor Roth IRA Conversion Over Two Tax Years?

Joe: Al, we got Thomas from Chula Vista writes in. He goes “Hello Joe and Al. Thank you for the great information you offer. I’m a loyal listener to your Saturday morning radio show. Your guidance regarding the following question is greatly appreciated.” Wow. That’s very, very proper.

Al: It is. And he goes by Thomas not Tom. So you know he probably-

Joe: Not Tommy.

Al: Yeah. Yeah. Not Tommy.

Joe: Probably got tons of cash.

Al: He’s a respectful man in Chula Vista.

Joe: They call me Joe-Joe. To give you any idea of where I’m at.

Al: I think they call you Joel.

Joe: No, our listeners call me Joel. On the street, who knows what they call me? Here’s his question, here’s Thomas’ question. “What are the steps needed to properly report a Backdoor Roth over two tax years. For example, in calendar year 2021 prior to the filing deadline, I invest $6000 as a non-deductible IRA contribution for the year 2020. The money is then immediately transferred to a Roth. So there is no gain. For tax year 2020, I reported the non-deductible IRA contribution on form 8606. On 1099R, which will be issued for the $6000 removal of the IRA will not be received until the calendar year 2022, tax year 2021. Do I simply report that 1099R as a rollover? Will there be any complications since it was done over two separate tax years? Is there anything I should be aware of? I assume that this will not produce a taxable event but this just needs to be reported. Thank you again for all you do.” So Thomas is getting in the weeds here.

Al: And if our listeners followed that, I’m impressed.

Joe: Exactly. So what he’s stating is this, I am moving money from an IRA to a Roth IRA. Even though there is basis in the IRA. Any time you take money out of a retirement account there’s a reporting that needs to be done from the custodian stating you took $6000 out of this retirement account. Then a 1099 is issued and that’s just letting the IRS know hey Alan or Thomas here took $6000 out of his retirement account. Just be aware that this could be reported as income.

Al: So since the question got into the weeds, I’ll give you the weeds answer, but I’ll try to keep it succinct. So here’s what you do, Thomas. You file Form 8606 in the year you make the IRA contribution. It shows up on line 1.

Joe: The conversion.

Al: No, before the conversion.

Joe: OK.

Al: This is 2020. So this form 8606, line 1 says ‘enter your non-deductible contributions in traditional IRAs’ so you put it there. That’s what happens in 2020. In 2021, you pull out the same form, 8606. And now you put that same amount on line 2, which is ‘enter your total basis from traditional IRAs from prior years’. OK. That $6000 goes there. And then you put your Roth conversion on part two, line 16. And then, if you do the form right, it will show you owe no tax. That’s all you gotta do.

Joe: For those of you that have a deductible or maybe you don’t know that you have basis in an IRA. Look at the end of the tax return for Form 8606. Because we see this quite often is that when we look through clients’ or prospective clients’ tax return, all of a sudden you see that form 8606 and it says like $40,000 in basis. Because the CPA or the tax preparer has been looking at- because you’ve been making IRA contributions for the last 20 years but you had to hide the income to take the deduction, they’re monitoring the contributions and they’re also calculating the basis for you. And so when you’re looking at doing conversions then you look there and that’s where the whole pro-rata number comes from. Is that look at the basis versus the entire amount, do that divisor, and then that’s going to tell you how much is taxable versus not.

Al: And I would use caution there. I agree with that. But a lot of people change tax advisors, and so the number on a form 8606 is not correct or they don’t even tell their adviser they did a Roth contribution-

Joe: – IRA contribution-

Al: – I’m sorry- an IRA contribution, because it wasn’t deductible. So why should I even tell him? So in that situation, take a look at your prior IRA contributions that you did not deduct. And minus what you may have already converted and put that number on line 2 of form 8606. You don’t have to file an amended return, just fix it going forward. So you have it.

Joe: So there’s a lot of talk on Roth contributions, conversions, Backdoor Roth, because it gets complicated when you’re filing the tax return.

Al: It’s very complicated. And then you get the form 5498 after the fact.

Joe: Correct.

Al: It’s like sometimes-

Joe: And then you’re getting the 1099 the following year and then it’s like- and then the adjusted 1099s-

Al: When they used to be re-characterizations after the year-end that it was two different years and you didn’t get the 5498 for like a year and a half after you filed a return. And we had CPAs telling us you can’t- well then you can’t do the re-characterization. We don’t have any forms. No, you don’t understand, you get the form a year from now.

Joe: Yes, you’ll get it. Just not today.

Al: Oh boy. I’m sort of glad we don’t have that rule anymore. It was tricky to put on the tax return right.

Joe: We would have to write a full letter of explanation.

Al: We would have to educate the CPAs and I’m not- this is a hard thing and if you don’t do it all the time it’s difficult. And some CPAs would take offense. It’s like I’ve been in this business 30 years. I know how to do this and then we get the return and they didn’t know how to do it. That’s why we told you what to do.

Joe: And then the client gets a letter. Hey, you owe taxes and a 10% penalty for this conversion.

Al: I just hate that. And then the client goes well the CPA is really good. They know what they’re doing. I say I know they know what they’re doing, but they missed this one thing.

Joe: If you guys need help with that like Thomas did just give us a buzz and we can help you walk you or your CPA through this. So you know where to go YourMoneyYourWealth.com, ask us those questions. If anyone’s been audited before because of that, it’s a simple solution to fix.

And you can give us a buzz at 888-994-6257 or click the Get an Assessment button in the podcast show notes at YourMoneyYourWealth.com for an in depth help with your tax situation and your overall financial plan for retirement. Let’s face it, you’ll get a far more comprehensive analysis in a free two meeting assessment with a CERTIFIED FINANCIAL PLANNER™ from Pure Financial Advisors than you get from the YMYW podcast, it’s via Zoom video call so you don’t even have to leave the comfort of your own home, and it’s free. Find out if a backdoor Roth conversion makes sense for your situation and make sure you don’t screw anything up. Just click the link in the description of today’s episode in your podcast app to go to the show notes and sign up for your free financial assessment.

Can I Take a Coronavirus Related Distribution from 401(k) and Roth 401(k) and Put it In an IRA?

Joe: We got Eric from Gainesville, Florida. Gainesville. University of Florida. My old stomping ground.

Al. That’s your place right?. Yes spent how many years your life there? 5?

Joe: Yeah, probably 8.

Al: 8?

Joe: I should be a doctor.

Al: Got it.

Joe: “Al, Andi, and Joe. Alphabetical order seemed the only fair way. Sorry Joe, but Go Gators.” All right Eric, Go Gators. “I had to take some time off of work to look after my children while schools were shut down and our child care provider wasn’t able to look for out them. The financial impact was very minimal. But I believe it qualifies me to take a coronavirus related distribution from my 401(k). The primary reason I would want to take distribution was to get my money out of the company plan which I feel has high fees. I would then pay the money back into an IRA which I understand will be treated as a rollover and not as a contribution. I am curious about how the coronavirus related distribution would be handled in a Roth 401(k)? Since my account is approximately 14% Roth and 86% pre-tax, would the distribution come out in the same ratio? Or will I be able to specify what monies the distribution comes from?” Interesting question there.

Al: Yeah. So wouldn’t Eric typically go to his H.R. person and ask that question? Is it plan specific?

Joe: Well I think the CRD is so brand new- let’s kind of recap a little bit of what the coronavirus related distribution is.

Al: That’s a good idea.

Joe: You could pull out to up to $100,000 out of a retirement account and then you have the option to pay it back over a 3 year time period or you could pay the tax over a 3 year time period.

Al: If you decide to keep it.

Joe: Yes and there’s no mandatory withholdings for taxes. And so what Eric is thinking is- and then took to qualify you had been diagnosed with COVID or a family member or you had to have some financial hardship.

Al: Even if your income went down a little bit or maybe you’ve got child care issues. I mean I’m almost anyone would qualify.

Joe: Almost, yes. And there’s still more-

Al: And then there’s the last thing, is any other reason-

Joe: Any other reason.

Al: – that you can think of that we agree with.

Joe: So it’s pretty much free game. And so Eric’s going I got this 401(k) plan. I don’t like the fees. I don’t like the investments that I have in the 401(k) plan. So let me take a CRD, a coronavirus related distribution because I believe I qualified for it. I’m gonna take $100,000 out of the plan, but instead of repaying my 401(k) plan I’m gonna repay an IRA, any qualifying account. Since it goes from a 401(k) to an IRA then that qualifies because it’s still in the shell of a retirement account. And Eric’s assessment is correct that it won’t count as a $100,000 excess contribution. It just- you’re putting the money back into the retirement account. No harm, no foul, no taxes, no penalties, nothing.

Al: It’s like currently, you have 60 days to roll the money back into an IRA. Here you have 3 years. Starting January 1st, 2020.

Joe: So the interesting question Eric has is that I’m going to take $100,000 out and yes, I would believe it’s up to the plan document.

Al: I would think most plans would allow you to pick which you want to take from, pre-tax or Roth.

Joe: So you’re looking- and I get maybe what he’s trying to do is like maybe I take the Roth money out if I have $100,000 into the Roth and then put that into a Roth IRA. And then I have a lot lower fees so I can have higher compounding growth in my Roth because I have less fees.

Al: So I think the question, the kind of follow-up question is can you do it with a Roth? Can you take Roth 401(k) money out and then have 3 years to put it into a Roth IRA?

Joe: No question you can do that. But what he is stating is that 86% is pre-tax, 14% percent is Roth. So if he takes out $100,000 is it going to be pro-rata? Is it going to be $14,000 needs to come from the Roth account and $86,000 come from the IRA? That would be up to the plan document.

Al: That’s why I saying that the question should be directed to your H.R. department or whoever handles distributions from your 401(k).

Joe: And then from there you would put the $14,000 into your Roth IRA and then you would pay $86,000 into the IRA.

Al: That’s right. But I would think most plans would allow you to pick. Wouldn’t you agree with that?

Joe: It depends. I’ve seen very strict plans that are cheap. This is a pretty expensive plan. I’m guessing that the employer- if you got high fees in your 401(k) plan, it’s because the employer is not paying a lot of money for the plan, The plan is getting paid for by kickbacks within the overall fees that the mutual funds, that they have within the plan. So most employers that have really good plans, it’s expensive to administrate it; to set up and everything else. So I think there are a lot of bashing with 401(k) plans and we’re seeing lawsuits with 401(k) plans because of high fees. But then you could go I don’t know what the percentage is but it’s- we’ve just talked about on our TV show, it’s like what 60%, 70% of all businesses don’t even have a 401(k) plan.

Al: Correct.

Joe: You pick your battles. But Eric’s doing the right thing of saying hey if I can get money out of this thing, it might be a good deal. “Additionally I’ve heard Al theorize that keeping the CRD money in a brokerage account rather than paying it back into the retirement account for better tax diversification. My wife and I are in our late 30s, mid to late 30s, and have close to $250,000 in retirement funds, 42% Roth, 58% pre-tax. We currently do not have a taxable brokerage account; nor do I really see us setting one up in the near future as we have a long way to go before we max out our 401(k) plans. What other factors should I weigh before deciding to keep the money for tax diversification or pay it back? Thanks.”  Well, he’s in his 30s. And within that- he’s only got $250,000- I mean I don’t want to say only $250,000- because that’s a ton of money.

Al: Yeah, that’s a lot of money.

Joe: It’s a ton of money for someone in their 30s. But if 1/2 of it’s already in Roth, 1/2 of its pre-tax, does it make sense for him to pay the tax? It really depends on what his tax bracket is.

Al: That’s my thought too. It depends. I mean if you’re in a high tax bracket then I would keep it in the Roth and the pre-tax. If you have some room in your current bracket and it’s lower than maybe it’s going to be in the future, maybe it does make sense to keep outside and in a non-qualified account. And if you don’t have a non-qualified account now, my next question is, do you have an emergency fund? Maybe you do, maybe you don’t. You should have one and that would be 3 to 6 months of your living expenses. So that could be a good source for it. I know you don’t get a lot of return on an emergency account release it’s there if you need it.

Joe:  It depends on your tax bracket, Eric. I think if you’re in the 10% or 12% tax bracket, I would take it out, put it into a brokerage account. If you’re higher than that, it probably might make sense to put it back in a retirement account. Thanks a lot Eric, appreciate your email and Go Gators.

If We Are Married Filing Separately Are We Considered Single for $1200 Stimulus Tax Credit?

Joe: We got Marion writes in from Fresno, California. “Hi Andi, Al, and Joe.  Joe hates being last.”

Al: But they keep putting you last, don’t they? People like to do that. It kind of puts you in check because you come on like a strong case of cologne.

Joe: Strong cologne. Do we have those comments? I gotta read those.

Al: I think they’re at the back.

Andi: Yeah.

Joe: Got it. Got it. ” If we file 2020 federal 1040 as married, finally separately, are we considered to be single for eligibility of the $1200 credit on our tax return? I cannot find anything on the IRS website about married filing separately; only single, head of household and married filing jointly. Your faithful listener, Marion.”

Al: So married filing separate is considered the same as single for purposes of the stimulus, I do know that.

Joe: And the income threshold is-

Al: Same as single.

Joe: No, it’s-

Al: For the stimulus it is.

Joe: Is it?

Al: Yep.

Joe: I thought it was- Andi throw up-

Al: According to this resource that I have, it’s adjusted gross income of up to $75,000 for individuals or married filing separate.

Joe: I think it’s- pull up our website- our workshop.

Al: Hold on. I already got the answer.  $112,500 for head of household and-

Joe: Oh, head of household was what I thinking. Yeah, yeah, yeah. Nevermind.

Al: – $150,000 for married couples.

Joe: Yep yep yep. You are right. I was thinking head of household.

Al: Yes you were.

Joe: I knew there was something else; head of Household, not married filing separately. Okay, Marion. Hopefully that helps.

Is Donald Trump Temporarily Waiving Capital Gains Tax on Real Property?

Joe: Monica. She’s got a question. She’s like “Good morning, Joe.” Good morning, Monica.

Al: This is addressed to you.

Joe: I know.

Al: It’s just you.

Joe: “I heard Trump is temporarily waiving capital gains on real property. Is that true?”

Al: Have you heard that?

Joe: I know that Trump talked about eliminating capital gains yes, or reducing the capital gains.

Al: I think he talked about reducing-

Joe: He tweeted it probably.

Al: Yeah, he did. I actually had not heard that. So I went to the trusty internet.

Andi: Went to Twitter?

Joe: That’s a good source.

Al: And no, didn’t go to Twitter. I can’t remember what I put in, but here’s what I got from Fox News. So I’m not- just understand the source.

Joe: Got it.

Al: Whether you like it or not, I don’t care. But anyway that’s where this is from. It says ‘Trump seriously considering capital gains tax cut and what it means for you.’ So first of all it’s not waiving. It would be a cut and it would, I can tell you based upon this article, it would only be cut if people in the very highest of tax brackets and probably in excess of a married couple of about $500,000 because that’s where roughly where the 20% bracket kicks in. So and looking at- oh I forget who did this study- but someone looked at this and said it would only help the top 1%. Now then there’s further discussion on whether he can actually do that without the approval-

Joe: Yeah he can’t.

We did a live webinar last week where Joe and Big Al talked about what might happen to your taxes under a Joe Biden presidency vs a Trump second term, and the fellas answered a whole bunch of money questions live on the spot to boot. If you missed it or want to relive the YMYW tax update webinar, click the link in the description of today’s episode in your podcast app and watch the webinar replay right there in the podcast show notes. If you’ve got questions that weren’t answered in the webinar or here in the podcast, click the “Ask Joe and Al On Air” banner there in the show notes and send ‘em on in. Ooh, and at the top of the show I mentioned our podcast survey – so far 30% of the folks who have filled it out said they didn’t know there were transcripts of the podcasts. There are! In the podcast show notes after all those free financial resources, you’ll find the transcript of the entire episode. Enjoy! And you can thank my Mama for doing the transcribing! Now let’s get to more of your money questions.

Self Employed: My Spouse Has a Retirement Plan, Would My SEP-IRA Contributions be Non-Deductible?

Joe: We got Tom from San Diego writes in Alan. “I recently retired from the Navy and have a pension. My wife still works and has a relatively high income, $170,000. Her employer has a 401(k) M plan, she works for the feds, to which she contributes the max. I started a consulting gig earning just a few thousand dollars a month. Before I retired, a retirement counselor recommended a SEP IRA and tucked everything I legally could from consulting into that account. But in looking at the IRS website in publication it looks like none of my contributions are deductible because my wife is covered by a retirement plan at work. Is my reading correct? If that’s the case it no longer makes sense for me to contribute to the SEP. I might as well tuck it into my investment account since I can’t use it to reduce my taxes and I can immediately access it instead of waiting until I’m 59 and a half. I’m 57 and a half now and she’s 55.” Great question Tom. Is his reading correct Alan?

Al: The answer is no. I’ll tell you what he’s looking at though. He is looking at the rules-

Joe: IRA.

Al: – of deducting IRAs, right. Which is different than a SEP IRA. Even though it does have the term ‘IRA’ in it, it’s a different beast. So let me explain. So when your spouse is in a retirement plan and you make between, let’s see-

Joe: It’s the Roth limits.

Al: – it’s the Roth limits. I thought I had it here. $195,000, $196,000- $196,000 – if you make less than $196,000 you can do a deductible IRA. There’s a phase-out period from $196,000 to $206,000. That’s only on regular traditional IRAs, not SEP IRAs. So Tom you can take a full deduction on a SEP IRA. But better yet, why don’t you open a Solo 401(k)? Because then you can put dollar for dollar on your income all the way up to $26,000 and still have an employee match which is calculated the same way as a SEP IRA. So you get a lot more in if that’s what you want to do.

Joe: So I guess the confusion Tom had is that when he looked under the, can I contribute to an IRA? It was like oh no your wife, or your spouse, has a retirement plan. And so there are different deductibility limits there. If your wife has a plan, if you don’t have a plan-

Al: You’re right.

Joe: – and so on and so forth.

Al: Exactly. But in this case the SEP IRA- now what’s weird, SEP IRAs sometimes is lumped into an IRA for other purposes, but not this one.

Joe: So yes you could start a SEP. But I agree with Alan, I would go with the Solo 401(k). Great question though.

Self Employed S-Corp: Can I Contribute Both the Employer and Employee Amounts to SEP IRA and Solo 401(k), Then Convert SEP to Roth?

Joe: Priya, she writes him from Irvine. I like that name. We had a Priya that worked here long time ago as an intern.

Al: I don’t remember. Oh I do remember. Yes. Early on. Yeah. Yeah. Very early on.

Joe: So anyway, “Hi Big Al-” Well maybe I don’t like Priya anymore. “-Joe and Andi.”

Al: Maybe that’s who worked for us. Maybe it is her. She knows you so ‘I like Big Al better’.

Joe: And you’re like ‘I have no idea who she is’. “First, I would like to thank you for an excellent podcast; educational, informational and at the same time entertaining. Who said investing and taxes should be boring and serious? Your team makes it fun. I recently discovered your podcast on YouTube. Now I’ve been binging.” Wow. Just binge on Your Money, Your Wealth®. Why am I getting – it’s like a drug.

Al: So many episodes.

Joe: It’s like a drug.

Al: Yeah.

Joe: It’s like ah, it’s awful. It’s the worst thing ever possible if you listen to more than one episode of this. Just coming down from a bad high. “I listen to your podcast when walking my dog.” Oh, it’s a yellow lab. A name would be helpful Priya. Maybe next time. “I like to read and listen to all things investing but only from credible sources. Since anyone can upload videos on YouTube I see everyone now as a financial expert giving investment advice. And I’m so annoyed by those and don’t listen to them.” So why the hell are you listening to us?

Al: I’m wondering that too. How do you discern?

Joe: I don’t know.

Al: We made the cut.

Joe: I have no idea. “But I think that’s how your podcast started showing up on my YouTube feed. Glad it did. Your podcase is different with Joe being a CFP® and Big Al a CPA with many years of real client experiences. Once I looked at getting my CFP® certification but nearly passed out after going through what it takes to do all that. And Andi is like a project manager; keeps the show running smoothly shining in the background.” Wow.

Al: Always.

Andi: Nice. Thank you, Priya.

Joe: Thank you, Priya. Priya’s got 3 main things. “Three main things I’d learned from your show so far are asset location, Solo 401(k) and Roth conversion.” That’s it.

Al: Yeah.

Joe: She’s binged 400 episodes. This is what I got for ya.

Al: That’s what she got.

Andi: 398 of them were about Roth conversions.

Joe: So we got Roth conversion down, asset location, Solo 401(k). “I wasn’t able to contribute to a Roth for the past few years due to income limits. I’m so mad that I missed out on those years without doing a Roth conversion. At least I will do it from this year. I live in Irvine, California; single; 40 years old; and own an S Corp. I’m the only employee in it and take $75,000 as W-2 from the S Corp. Current balances, got a rollover 401(k) of $400,000; a Roth IRA of $100,000; SEP IRA of $20,000. I also recently opened a Solo 401(k) with Roth option but I haven’t funded yet for 2020. So based on my W-2 wages of $75,000, can I contribute both the SEP IRA of $18,750-” So what she’s doing is dividing that probably by 25%-

Al: Just say 25%.

Joe: 25%?

Al: Yep.

Joe: “-and employee $19,500 to the Roth, and employer contribution of $18,750 to Solo 401(k) for tax year 2020?” So a little aggressive there.

Al: The answer is you gotta throw out the SEP-IRA. So if you have a SEP IRA you’re not allowed to have any other pension plan in that company.

Joe: She can do the $19,500 into the Solo 401(k) and the employer contribution which is the same calculation as the SEP of $18,750. So let’s call it $40,000. If she had the $75,000 income.

Al: Close to $40,000. You do have- it’s not quite 25% of your profits because you have to deduct 1/2 of the self-employment tax so it works out probably closer to $17,000 or $18,000 instead of $18,750, but the concept is right. Nearly $40,000 you can contribute, but you can’t have a SEP IRA and a 401(k) in the same company.

Joe: So you can do the Solo 401(k) and the match. If you want to do the Roth that would be post-tax and then the employer contribution would be pre-tax.

Al: Exactly.

Joe: “Will the SEP-IRA and employer portion of the Solo 401(k)–?” I just answered that. “I’m planning to do the following steps. Let me know if this makes sense and is legal.”

Al: Oh okay.

Joe: “I understand I will have to pay taxes on the amount of being converted to a Roth IRA. A) convert the existing SEP balance $19,000 to my Roth IRA in year 2020 for tax year 2020.” So she wants to get rid of the SEP. She wants to move the $20,000 in the SEP right now and roll it into the Roth. “Then convert the 2020 SEP and Solo 401(k) employer side contribution of $37,500 to the Roth in 2021 for tax year 2021.” No. Because you have too much money there. Because you’re already putting in the SEP in the Solo 401(k).

Al: Just take the SEP out but you can convert that employer match if you want. That’s legal.

Joe: Of course, that’s totally legal. You could convert the- well you’ve got $400,000 in an IRA. You can convert that into a Roth IRA.

Al: If you want to.

Joe: So I would just do the Solo 401(k) if you want to do the Roth option. Do the employer match. And then start- convert the SEP of $20,000. Do that this year. Then next year start chipping away at the rollover IRA. You’ve got $400,000 there. You can do small conversions, you’re only 40 years old. Over the next several years, you get most of that into the Roth, compound tax-free. All good to go.

Al: I like that.

Joe: “Apologies for the long email. I hope you select my email and answer my question. Waiting to hear back from the expert.” Wow. Answer, comment section. Thank you. Keep up the good- Oh, she wants us to do this on the TV show.

Al: Oh, too late.

Joe: This is a way too long a email for the TV show.

Al: I have to read it. It has to be- 15 words or less.

Joe: Yes. I mean we’re doing the TV show. Those email questions are like- ‘can I do a Roth IRA?’ Yes. All right. We’ve got to go to break.

Self-employed small business owner entrepreneur types, click the link in the description of today’s episode in your podcast app to go to the show notes for a whole mess of free financial resources especially for you. We’ve got a whole YMYW TV show episode about retiring as a self-employed person in the new gig economy, a giant blog post on small business tax filing, video of Joe and Big Al discussing the benefits of the Solo 401(k) and Solo Roth 401(k), and a video outline of the best self-employed retirement plans. Got questions? The fellas have answers, and they might even make sense to you! click the “Ask Joe and Al On Air” banner there in the show notes and send us your questions.

Should I Contribute to Roth or Traditional TSP?

Joe: Back to the email bag. So we’ve seen this email that Andi’s put on our list now for the last 6 weeks and we still ignore it. And I’m going to ignore it again today.

Al: One more time?

Joe: No, I’m kidding.

Al: Gonna do it. Ok, let’s see.

Joe: It’s René? Or Renee.

Andi: It’s René.

Joe: René. “Hi Andi, this is René. I really miss you.”

Andi: It doesn’t say that.

Joe: Well I mean why are you-? This is like a personal email. I feel like I’m violating- like I’m invading someone’s privacy.

Al: Let’s let Andi answer this question.

Joe: “I still have no idea what percentage should I do in my TSP regarding the traditional and Roth. So far currently I’m doing 10% including my max contribution from my employer; 5% employer, 5% me; total 10% to traditional. And the rest of my Roth is about 27%.

Al: 27% of her salary?

Andi: His salary. René is a he.

Al: That’s what I get.  10% of her salary- actually 5% of her salary- is going to traditional, then her employer matches 5%; and then another 27% of her salary goes to Roth. That’s what I get.

Joe: I got 27% of the balance is in Roth. But whatever-

Al: We could answer both questions.

Joe: “But not sure if that is right way for future efficiency purposes. Please, any idea? I’m planning to work till 62; I’m almost 46 by November this year. Thanks so much in any way.” If it’s 27% of the income is going into Roth, well why not put everything into the Roth? Because then it seems like- because you can only put in- he’s 46 years old or she’s- is it?

Andi: René is a he.

Joe: Well he, René is 46 years old. It’s $19,500. So that’s why I was saying 37%-

Al: No, it’s 5% employer match. So I think it’s 32%? Try that. So $19,500 divided by .32-

Joe: – is $60,000.

Al: Could be making $60,000.

Joe: So let’s say René is making $60,000, and he’s putting 27% in the Roth; I think he might be confused that why even put- at $60,000 if he’s single with the standard deduction-?

Al: I’ll betcha what he’s thinking was to get the match I have to do traditional.

Joe: Exactly. That’s what I would say.

Al: And I don’t think he does. In most plans it doesn’t matter whether you do Roth or Traditional, you still get the employer match.

Joe: And the employer match will be pre-tax.

Al: That is pre-tax.

Joe: It’ll be taxable. The company is getting the tax deduction.

Al: That’s right. So yes. But as far as ‘is that the right percentage?’ We need a little more information.

Joe: Right. If he’s single, then it’s like he’s in the 22% tax bracket with $60,000 of income. That’s still pretty low and he’s 46 and he’s saving that much money. I would go Roth and just compound the hell out of it until you make- until tax rates change and then you might want to max out that the 12% or the 15% tax bracket pre-tax. And then your additional savings would go Roth.

Al: It also depends on how much you already have. If you get nothing in a regular 401(k), you might put some in just for a tax deduction to get some tax diversification.

Joe: But most people that have a TSP plan also have a pension.

Al: That’s true. Which is like a regular you know-

Joe: So it’s going to be ordinary income coming out.

Al: That’s true.

Joe: So I don’t know, 46. Here’s what- I’ve said this 1,000,000 times and I’ll say it again, is that you will not miss the tax deduction by going all Roth right now. You won’t. If you’re jammin’ that much money in, go 100% Roth, get the pre-tax from the employer match, and then have everything come out tax-free. If you start making a lot more money where you’re in a lot higher tax bracket, then you can start worrying about it. But the 12% or the 22% of a few bucks you’re not going to miss it 20 years from now when you have a giant TSP that’s 100% tax-free.

Al: That’s actually an excellent point because I think a lot of people get so caught up in the mathematics of what’s my tax rate now versus what’s my tax rate in 20 years?

Joe: Who knows?

Al: And it’s like to do this calculation presumes that you’ve saved that tax dollar and you probably will spend it anyway.

Joe: Exactly.

Al: Yes. So you actually probably better off just having it out of sight, out of mind. Have it go to a Roth and be tax-free later.

Joe: Yeah call me in 20 years when you’re 66, and you have $1,000,000 tax-free, that’s 100% yours. You take that the whole tax equation out. It’s like the uncertainty of taxes is off the table. Who cares?

Al: OK.

Joe: Anything else? Is that- were you going to answer that differently Andi?

Andi: No, it sounds good to me.

Al: Because he did ask you. What do you think? Andi, what do you got? What’s your allocation to Roth versus regular?

Andi: What is mine? Right now I am contributing to get the employer match and everything else I’m putting into my Roth.

Al: Same thing.

Joe: Are you sure you’re not René?

Al: It’s kinda looking that way.

Joe: You could put 100% into your Roth and we’ll still match the 401(k).

Andi: Okay, then I’ll change that.

All: See people don’t know that. That’s the- we got some good information now.

Joe: Way to dive in a little bit. I’m gonna start calling Andi René. She’s sending in like questions for her own benefit using this platform.

Al: René with an accent over the ‘e’ too.

Andi: Actually, I wish I had thought to ask that question but now René’s asked it for me so I can fake some other question for you guys.

Joe: I got it.

Al: What other name are you gonna pick next time?

Andi: I’m not going to tell you.

Comment: Joe Comes On Like an Extra Spray of Cologne

Joe: Oh. We get these-

Al: Get the comments.

Joe: -reviews.  We get these reviews. Juan gave us something. He goes “Best in the biz right now. Have been listening to literally dozens of financial podcasts over the last decade or so. I find this one to be the best of the bunch. Joe comes off strong at first like an extra spray of cologne but boy is he knowledgeable and humorous. Al is the perfect straight guy and Andi produces an excellent show. Bravo.” An extra spray of cologne?

Al: Well you come on strong.

Joe: I don’t- what the hell’s that all about? I don’t think I come on strong.

Al: Yeah you do.

Joe: I just talk.

Al: Especially when you talk about annuities.

Joe: But an extra spray cologne. Hopefully it’s good cologne.

Al: Hopefully it’s not that bad cologne.

Joe. We know some people that wear some heavy cologne.

Al: We do.

Joe: It’s almost- it’s horrible.

Al: It’s a little much.

Joe: It burns your nostrils. So Juan, hopefully this show doesn’t burn your nostrils.

The Derails: More Comments
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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.