Vanguard Individual 401 K Roth contributions

[Guest Capt. Mike]

Hi folks,

I was sent here by the suggestion of some folks at the Bogleheads Investment Forum. They thought some here might be able to make suggestions w/ regard to our inquiry to follow...

My wife and I are real estate sale associates. We each get a 1099 from our employer. We file taxes jointly and I think we are considered sole proprietorship(s).

We get paid with commission checks. To balance social security we designate to which one of us the commission should be made out to based on prior commission checks and how the social security estimated benefits look.

We would like to open at least one Vanguard Individual/Solo 401K and make ROTH contributions only. No employer contributions.

I wanted to do it last year but got caught by the requirement that the account be open by Dec 31, 2010.

The difficulty is we do not know if either one of us will show a profit until our taxes are done which doesnt happen until after Dec 31.

For example, can I open a Vanguard Individual 401K in my name tomorrow and make a contribution even if I do not know if I will show a net positive profit for 2011?

I mean do you HAVE to show a profit in order to be able to open an account and make a contribution? My concern is I open an Individual 401K account now with a small contribution just to get it open. Then come April 2012 we/I show a loss for tax year 2011. Is that a no, no?

In 2010 I showed a profit of $53000.00 and hers was $36000.00. We could have most of the commission checks made out to one person so that that person would be more likely to show a profit but that would throw the social security out of whack.

Can some one tell me based on 2010 profit of $53000.00 what my max ROTH contribution amount to the Vanguard Individual 401K for 2010 could have been? Just to make me feel bad.

If I could open an Individual 401K this year could I make contributions to it with money from tax year 2010 profits which we have set aside?

If any one has any guidelines or strategies on how we might make this work I sure would appreciate your input I am confused.

Kind regards, Capt. Mike

[K2retire]

You are correct: the plan must be established by December 31 AND you cannot make a contribution in any year when you do not have a profit, nor can the contribution be more than your net profit. Because you are self employed you have until your self employment income has been determined to make the deposit for the year. The IRS considers the plan to be established when the legal documents creating it are signed. Most fund companies consider the plan to be established when you make your first deposit.

Since you have the ability to control how the income is reported between the two of you, you could establish the plan now for one of you and make sure that one has a profit for the year. The next year, you could do the same for the other spouse. Once the plan has been established, that December 31 deadline is no longer a problem in future years.

The amount that can be contributed each year is indexed for inflation, although it has been the same for the past 3 years. For 2011 it is $16,500 for people who are 49 or younger. It is $22,000 for those of us 50 or older.

[12AX7]

Capt. Mike, if it's any consolation, you can establish a SEP plan up to the date of the employer's tax filing due date. The contributions would intially be pre-tax, but could be converted at a later time to Roth.

[mbozek]

Hi folks,

I was sent here by the suggestion of some folks at the Bogleheads Investment Forum. They thought some here might be able to make suggestions w/ regard to our inquiry to follow...

My wife and I are real estate sale associates. We each get a 1099 from our employer. We file taxes jointly and I think we are considered sole proprietorship(s).

We get paid with commission checks. To balance social security we designate to which one of us the commission should be made out to based on prior commission checks and how the social security estimated benefits look.

We would like to open at least one Vanguard Individual/Solo 401K and make ROTH contributions only. No employer contributions.

I wanted to do it last year but got caught by the requirement that the account be open by Dec 31, 2010.

The difficulty is we do not know if either one of us will show a profit until our taxes are done which doesnt happen until after Dec 31.

For example, can I open a Vanguard Individual 401K in my name tomorrow and make a contribution even if I do not know if I will show a net positive profit for 2011?

I mean do you HAVE to show a profit in order to be able to open an account and make a contribution? My concern is I open an Individual 401K account now with a small contribution just to get it open. Then come April 2012 we/I show a loss for tax year 2011. Is that a no, no?

In 2010 I showed a profit of $53000.00 and hers was $36000.00. We could have most of the commission checks made out to one person so that that person would be more likely to show a profit but that would throw the social security out of whack.

Can some one tell me based on 2010 profit of $53000.00 what my max ROTH contribution amount to the Vanguard Individual 401K for 2010 could have been? Just to make me feel bad.

If I could open an Individual 401K this year could I make contributions to it with money from tax year 2010 profits which we have set aside?

If any one has any guidelines or strategies on how we might make this work I sure would appreciate your input I am confused.

Kind regards, Capt. Mike

You have two options for 2011.

1. Form a business entity with your spouse such as as a partnership or LLC so that at least one of you can contribute to a 401k plan. You can set up the plan by Dec 3, 2011 with a minimal contribution of $50 if state law requires a token amount to establish a trust and contribute the full amount when you file your tax return. You need to consult an attorney to determine the best form of business entity for you. In future tax years either or both of you can contribute to the plan up to the date for filing the tax return with extensions.

2. Wait until you are sure that either you or your spouse will have net income from self employment for 2011 and establish separate SEPs at any time up to Oct 15, 2012. When you finally establish a 401k you can rollover the SEP to the Roth 401k account and pay taxes on the conversion.

As for 2010 you and your spouse can each contribute to a SEP by Oct 15 2011 if you filed for an extension to pay taxes by Apr 15, 2011. You can establish the SEP up to Oct 15, 2011and contribute on the same date.

[Guest Capt. Mike]

Hi folks,

I was sent here by the suggestion of some folks at the Bogleheads Investment Forum. They thought some here might be able to make suggestions w/ regard to our inquiry to follow...

My wife and I are real estate sale associates. We each get a 1099 from our employer. We file taxes jointly and I think we are considered sole proprietorship(s).

We get paid with commission checks. To balance social security we designate to which one of us the commission should be made out to based on prior commission checks and how the social security estimated benefits look.

We would like to open at least one Vanguard Individual/Solo 401K and make ROTH contributions only. No employer contributions.

I wanted to do it last year but got caught by the requirement that the account be open by Dec 31, 2010.

The difficulty is we do not know if either one of us will show a profit until our taxes are done which doesnt happen until after Dec 31.

For example, can I open a Vanguard Individual 401K in my name tomorrow and make a contribution even if I do not know if I will show a net positive profit for 2011?

I mean do you HAVE to show a profit in order to be able to open an account and make a contribution? My concern is I open an Individual 401K account now with a small contribution just to get it open. Then come April 2012 we/I show a loss for tax year 2011. Is that a no, no?

In 2010 I showed a profit of $53000.00 and hers was $36000.00. We could have most of the commission checks made out to one person so that that person would be more likely to show a profit but that would throw the social security out of whack.

Can some one tell me based on 2010 profit of $53000.00 what my max ROTH contribution amount to the Vanguard Individual 401K for 2010 could have been? Just to make me feel bad.

If I could open an Individual 401K this year could I make contributions to it with money from tax year 2010 profits which we have set aside?

If any one has any guidelines or strategies on how we might make this work I sure would appreciate your input I am confused.

Kind regards, Capt. Mike

You have two options for 2011.

1. Form a business entity with your spouse such as as a partnership or LLC so that at least one of you can contribute to a 401k plan. You can set up the plan by Dec 3, 2011 with a minimal contribution of $50 if state law requires a token amount to establish a trust and contribute the full amount when you file your tax return. You need to consult an attorney to determine the best form of business entity for you. In future tax years either or both of you can contribute to the plan up to the date for filing the tax return with extensions.

2. Wait until you are sure that either you or your spouse will have net income from self employment for 2011 and establish separate SEPs at any time up to Oct 15, 2012. When you finally establish a 401k you can rollover the SEP to the Roth 401k account and pay taxes on the conversion.

As for 2010 you and your spouse can each contribute to a SEP by Oct 15 2011 if you filed for an extension to pay taxes by Apr 15, 2011. You can establish the SEP up to Oct 15, 2011and contribute on the same date.

Hi,

I appreciate all the info and perspectives.

W/ regard to business entities we are in a catch 22. Yes we should form and LLC if not for liability issues alone. However, we are licensed real estate sales associates in the State Of Florida. Unfortunately the State of Florida licensing rules and regs for real estate sales associates would require us to form TWO LLCs. One for each of us. As real estate sales associates the State will not let us practice real estate sales together under one LLC.

Forming 2 LLCs just is not practical and would make managing things including taxes more difficult and costly.

For now I would like to stay with the 401K path rather than the SEP.

Thank you ALL very much.

Kind regards, Capt. Mike

[Bird]

It sounds like the issue is that you don't know right now which of you will have income for the year, but if you are in fact designating commission checks then you ought to have a good idea by December. So just set up the plan in December. Heck, set up two plans in December. Or set up two plans now (it's not like you have to fund it/them right away). I just wouldn't fund it/them until I was pretty sure I had the profits necessary to justify the contributions.

You can each "defer" (contribute) up to $16,500 ($22,000 if over age 50) as a regular 401(k) or Roth or combination, but not more than your profits (actually a little less because you have to factor in half of your SS and Medicare taxes).

I'm not a big fan of big investment company off-the-shelf plans as they get messed up constantly, due to the investment companies making them seem easier than they really are. (This conversation being a case in point.) But be sure to sign any documents that Vanguard sends you in regards to keeping the plan language up-to-date, and keep in mind that you have to file a plan tax return when assets exceed $250,000 - or in the final year of the plan, no matter what the assets.

[movedon]

I'm not a big fan of big investment company off-the-shelf plans as they get messed up constantly, due to the investment companies making them seem easier than they really are. (This conversation being a case in point.)

Absolutely. I have had this experience with my clients as well as with my (and my wife's) own solo k plan with a couple different companies (I won't name names, but their names rhyme with "shmipelity" and "stan-hard"). Not only do they make it seem easier than it is, but you are also likely to have service issues when you call with technical pension issues and find that the solo k department is separate from their normal institutional department and the people (children) answering the phone there are not pension experts. Combine that lack of subject-matter knowledge with the training they all seem to get that teaches them that they must act confident on the phone and never consider admitting they might be wrong about something, and you have yourself a mighty frustrating experience. Even as a professional pension consultant, it required a lot of work on my part to convince them that I know what I'm talking about and that the transfer of assets I was trying to accomplish from their solo k platform to their pooled institutional platform is a transfer and NOT a rollover (because I finally got frustrated with their ineptitude and wrote my own plan document). If a couple grand out of pocket initially and about every six years plus a couple hundred a year for required amendments, etc. is not a vast sum of money to you, do yourself a favor and find a pension consulting firm in your town and pay them to do your document.

[Guest sabdinK]

Employees automatically signed up for 401(k) plans do not contribute as much as one might think, as reported by a recent study. It turns out people contribute more to their retirement when they choose to start a 401(k) themselves, instead of when one is started on their behalf. I read this here: Automatic 401(k) enrollment plans less effective than opt-in.