Author Topic: can i open a roth 401k?  (Read 3776 times)

cjw7

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can i open a roth 401k?
« on: June 10, 2014, 07:38:00 AM »
I would like to start a retirement account, but I don't have an employer who offers 401k. It doesn't make much sense for me to open a traditional retirement account since  income on paper comes from rental properties and online business, so any money going into a retirement account would be after tax. Regular roth ira is 5500 limit for this year, so that isn't much.
I don't completely understand how roth 401k works, but it seems I can open one since I am self employed. If anyone can tell me how this works, I would appreciate it. The contribution yearly is higher, if I understand correctly.

rmendpara

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Re: can i open a roth 401k?
« Reply #1 on: June 10, 2014, 09:29:17 AM »
Vanguard offers a few options on the website.

I can't offer anything specific, but have heard that similar rules apply like total contribution limit of $52k... plus a few nuances regarding how the employer portions are treated.

cjw7

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Re: can i open a roth 401k?
« Reply #2 on: June 11, 2014, 05:38:03 AM »
anyone self-employed have more details?

randymarsh

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Re: can i open a roth 401k?
« Reply #3 on: June 11, 2014, 05:56:43 AM »
If you're self employed, you can do a SEP IRA, Solo 401k, or SIMPLE IRA. The SIMPLE contribution limit is lower than the other two options. AFAIK, there's no "Roth 401k". You have a 401k, but can make "Roth" (after tax) contributions to it. 

You can indeed put money into these before tax, which is probably want you want to do. I'm not familiar with rental income, but you can definitely contribute online revenue. This will reduce your taxable income.

bacchi

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Re: can i open a roth 401k?
« Reply #4 on: June 11, 2014, 10:43:15 PM »
What rmendpara wrote. Vanguard has a self employed Roth 401k. It works as expected -- like a regular 401k but with after-tax contributions. The maximum contribution is the same as a solo 401k ($17.5 + profit sharing). I split my contributions 80/20 between the two accounts (regular and Roth 401k).

You probably won't be able to put rental income into a 401k since it's not earned income. However, an HSA can take any $$, including gift money.

I'm confused why the online income is post tax. If you're self-employed, it can be put into a regular solo 401k pre-tax.


cjw7

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Re: can i open a roth 401k?
« Reply #5 on: June 12, 2014, 07:53:16 AM »
I don't understand why rental income can't be placed into a roth 401k. I still pay taxes on it. That would be the bulk of my income. The online income is not much. I guess it would be pre-tax since I pay taxes on it after I receive it.
I haven't found much info on roth 401k or how to go about it. Are the contributions treated the same way as a regular roth, where they aren't tax deductible? How about distributions after retirement?
At this point I don't have health insurance and I did look into an HSA, but it seemed that the premiums would be around 300/month which is ridiculous when I have never needed health insurance, am fairly healthy and rarely get sick.

bacchi

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Re: can i open a roth 401k?
« Reply #6 on: June 12, 2014, 08:59:52 AM »
Rental income is generally considered passive income. Only earned income can be used for a 401k or IRA.

Roth 401k contributions are not tax deductible, just like a Roth IRA. Contributions can not be withdrawn at any time, unlike a Roth IRA. Withdrawals made after age 59.5 are tax free, like the IRA.

You can also roll a Roth 401k into a Roth IRA.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts


edit: withdrawals, not contributions, are tax free after 59.
« Last Edit: June 12, 2014, 03:05:17 PM by bacchi »

rmendpara

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Re: can i open a roth 401k?
« Reply #7 on: June 12, 2014, 09:41:32 AM »
I don't understand why rental income can't be placed into a roth 401k. I still pay taxes on it. That would be the bulk of my income. The online income is not much. I guess it would be pre-tax since I pay taxes on it after I receive it.
I haven't found much info on roth 401k or how to go about it. Are the contributions treated the same way as a regular roth, where they aren't tax deductible? How about distributions after retirement?
At this point I don't have health insurance and I did look into an HSA, but it seemed that the premiums would be around 300/month which is ridiculous when I have never needed health insurance, am fairly healthy and rarely get sick.

The IRS does not classify rental income as earned (i.e. "W-2") income. There are ways to get around this, like setting up a corporation and putting your properties in it, then doing some wishy washy book keeping, and stuff like that.

Unless you have a monster RE portfolio >$1m, it's probably not worth it.

chucklesmcgee

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Re: can i open a roth 401k?
« Reply #8 on: June 13, 2014, 11:26:52 PM »
anyone self-employed have more details?

Yes, I have my own S-Corporation and run my own Roth 401k. I had a company called Broad Financial set it up. An employer (in this case my corporation) has to offer the 401k, so no luck if your employer doesn't offer one and you aren't self-employed.

For a Roth 401k, the employee contributions are Roth and are currently limited to $17500 a year. This comes out of your paycheck, but taxes are still due on what you contribute, like any Roth contribution. I set up my payroll to record the amount transferred every month.

The employer contributions are considered traditional contributions and the total contributions, employer plus employee contributions, cannot exceed $52000. So with the maximum employee contributions of $17500, employer contributions can be at most $34500. This comes with the caveat that employer contributions can't exceed 25% of your compensation, so to contribute $34500 from the employer, you have to be paid at least $138,000 in salary.

The mechanics are pretty simple. I have two trust checking bank accounts (free through PNC) in the name of my company. Every month I take a corporate check, write it out in the name of "XXXX Trust" for the amount of my employee contribution, write "FBO [My name] Roth 401k [Month] [Year]" in the memo line and deposit it. I have a second checking account for the employer deposits.

From there I invest in whatever I feel like in the name of the trust. I had been doing prosper loans, recently moved to bitcoin. IRS reporting requirements are pretty minimal until the value exceeds $250,000. Roth contributions don't affect my liability for the current years so there's not much to report on the personal side either.