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:
https://www.madfientist.com/section-199a/ 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 can’t exceed 20% of your taxable income.”
Here’s where I’m confused. I’m wondering if it still makes sense to do pre-tax retirement contributions in my situation.
I’m a sole proprietor (service business), making $60-$70k, no employees, no other income. For the sake of the example, let’s say I make $60k.
60k – 12k standard deduction = 48k of taxable income, so I’d 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 I’d 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, you’d 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 what’s best (remembering that the money saved in the SEP scenario could be taxed eventually).
Putting together your own little tax-calculator spreadsheet isn’t 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!