Author Topic: Switching from SEP IRA to Roth Solo 401k - How to Proceed  (Read 377 times)


  • 5 O'Clock Shadow
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Switching from SEP IRA to Roth Solo 401k - How to Proceed
« on: October 25, 2018, 06:20:20 PM »
A few months ago I opened a traditional SEP IRA to add to my existing ROTH IRA. I'm self-employed, so I can have both a SEP (or solo 401k) and a Roth IRA.

I went with a (traditional) SEP IRA, but I'm now regretting that decision and would probably like to switch to a Roth Solo 401k next year - if that's even possible.

My reasoning is because of the Section 199a deduction, which is the new 20% deduction for self employed earnings. It's described in more detail in this article:

Basically, as I understand it this new deduction significantly changes the math on traditional vs. roth for folks with self-employment income.

I'll quote my own comment on that article:

The Section 199A deduction cant exceed 20% of your taxable income.

Heres where Im confused. Im wondering if it still makes sense to do pre-tax retirement contributions in my situation.

Im a sole proprietor (service business), making $60-$70k, no employees, no other income. For the sake of the example, lets say I make $60k.

60k 12k standard deduction = 48k of taxable income, so Id get a ~$9,600 deduction under Section 199a correct?

BUT, if I contribute to my SEP IRA, which I was planning on doing:
60k 12k standard deduction 10k SEP = 38k of taxable income, so Id get a ~$7.6k deduction right?

In this situation, does it still make sense to make pre-tax SEP contributions, or should I look into getting a Roth Solo 401k? (already maxing a personal Roth IRA).

And MadFientist's reply:

That sounds like it could be a great plan. In this case, youd be trading tax-deferred retirement money for tax-free retirement money (and thanks to Sec. 199A, you may not even have to pay more taxes up front for the privilege).

In cases like these, I like to put together a simple spreadsheet to run the numbers so you should do the same. Have two columns (one for the SEP scenario and one for the Roth scenario), play around with the contributions, and see whats best (remembering that the money saved in the SEP scenario could be taxed eventually).

Putting together your own little tax-calculator spreadsheet isnt that difficult to do but it really helps you understand the rules and how all the variables interact.

So, 2 things - am I missing something with this thinking?

And two - how does it work to switch from a SEP IRA to a Roth Solo 401k? Can I have both? Can I contribute to both in the same tax year?

I tried Googling but didn't get a clear answer. Thanks!


  • Handlebar Stache
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Re: Switching from SEP IRA to Roth Solo 401k - How to Proceed
« Reply #1 on: October 31, 2018, 10:08:01 AM »
Following for the math. I will be in this situation soon.

I imagine traditional will still win because as I understand it, employer matching funds MUST be traditional. At least for regular w2 employment.

However, even if both can be roth, traditional avoids state taxes and federal taxes that are likely way over 20% (even then the 20% saved is only on the employer's side)


  • Handlebar Stache
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Re: Switching from SEP IRA to Roth Solo 401k - How to Proceed
« Reply #2 on: November 03, 2018, 11:39:26 AM »
You can't have both, you can only do a SEP IRA or a Solo 401K.

I prefer the Solo 401K because it provides the benefit of a SEP, employer deduction, but you also get the benefit of having a salary deferral as the employee.

If you're self employed by doing a pre-tax deduction you get the benefit of not paying state and federal tax on that money, but also you get the benefit of a reduced AGI which yields a greater amount of subsidies on the ACA health exchange.


  • Bristles
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Re: Switching from SEP IRA to Roth Solo 401k - How to Proceed
« Reply #3 on: November 07, 2018, 09:07:32 PM »
I think the Sec 199A would be a little less valuable than you outline in your 60k example. Your taxable income will be further reduced by 1/2 SE tax, SE health insurance premiums, etc.