Solo 401k affecting IRA deduction

Submitted by Karen Hunter on Thu, 2017-11-16 15:17

1. I’d like to do a backdoor Roth because my income limit is higher this year to fund a Roth directly. I read that I first need to rollover my old traditional IRA into a 401k, so I want to open a Fidelity solo 401k. My main job does not offer a 401k plan at work, but I am doing some school tutoring work on the side and will get this tutoring work reported on a 1099 form (which earns me about $1,000 a year). My main job does not offer a 401k or any other benefits plan. If I open a solo 401k, does that mean that I would now be considered to be covered by a retirement plan at work? The IRS sets the IRA deduction limits differently depending on whether I am covered by a retirement plan at work (such as a 401k or not), so I was wondering if that means that I would now be considered “covered” by a retirement plan at work even if what I would be able to contribute to the 40k would be small?

2. If yes to #2: Let’s say that I am a tutor this year and then stop by December 31 so that I do not earn this side income next year. I imagine I cannot contribute to the solo 401k next year since I would not be working as a tutor anymore, right? Would I still be able to keep my Fidelity solo 401k open in future years to use for rollovers if needed at least?

3. If yes to #3: does that mean that as long as I have the solo 401k account open or active, I will be considered “covered” by a retirement plan at work in the future? Or does that depend on whether I cannot contribute to it once my solo tutoring job ends? Can I keep it “open” to use for future rollovers even if I cannot contribute to it, and I would then be considered “not covered” with a retirement plan at work?



Submitted by Alan - IRA critic on Thu, 2017-11-16 17:24

  1. Yes, you would be covered by a plan but that wouldn’t matter because you will not be deducting your TIRA contribution anyway. You will make a non deductible contribution, which anyone with earned income can do, and then convert it.
  2. A solo K must be terminated within 6 months of when the business ceases to operate. It’s a gray area between when it ceases to operate vs. just becoming a non consistent business. If you actually are going to stop tutoring next month and not even seek a job at all in 2018, you are rolling the dice by not closing the solo K which would force you to roll the money back to an IRA. Your back door Roth would only work for 2017 in that case. Fidelity’s solo K plan might also have relative provisions for you to pre check with them.
  3. Again, it does not matter if you are covered by a plan if you are not seeking an IRA deduction. You can forget about that issue, however your main concern is how long you can keep the solo K open if you are not tutoring. The IRS would probably not become concerned about this until the January that you do not get a 1099 for the prior year.
  4. What you are planning is a back door Roth contribution, and that process starts with making a non deductible TIRA contribution and then converting it to a Roth tax free. That conversion will only be tax free if your TIRA accounts do not hold any pre tax dollars at year end. That is why you would roll the pre tax balance of your IRA into the solo K by year end. Be very careful not to roll any non deductible contributions into your solo K by accident since that is not allowed and will result in problems.

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