Out of work, transitioning to self-employment, best 401(k) and IRA options?

[michael]

As of yesterday, I have left my full-time employment position where I have about $60k in the company 401(k). I'm taking some travel time for the next couple months, and then will be starting self-employment contracting with the same company - but there's no 401(k) benefit in my contract, of course. I have an existing T-IRA as well as a Roth IRA, because my previous annual income ($135k) excluded me from tax-deductible IRA contributions and I have been doing the backdoor traditional->Roth conversions for tax-free growth, at least. By the end of the year, I anticipate my annual salary will work to have been $90k or so (Jan-Jul full-time gross is $77k, plus the remaining part-time work for the last three months of the year).

I can move my current 401(k) balance to either the T-IRA or the Roth, but I don't think I want to move it to the Roth as I understand I'll have to pay taxes on the balance. I have already contributed $5500 to the T-IRA (and performed the backdoor conversion to the Roth) for 2015; can I still convert the 401(k) to the T-IRA? If yes, should I then backdoor-convert that to the Roth? Oh, and the current 401(k) provider is not very good, so I don't want to bother leaving it with them.

For next year, I think I should open either a SEP or an individual 401(k). It seems I could contribute more to the individual 401(k), if I were making a lot of money, but I don't anticipate my self-employment income to be more than $50-60k or so at best. Is one of these options better than the other? Should I still work on the T-IRA and Roth IRA or does one of these exclude that option?

I know I have some options here so I'm looking for some help in clarifying the best course for the rest of this year, and into the next as a self-employed consultant. Thanks so much for reading!

[MDM]

I have an existing T-IRA as well as a Roth IRA....

When you say "have", does that mean you have a positive balance in the tIRA?

If so, have you dealt with the "Caution" mentioned in http://www.bogleheads.org/wiki/Backdoor_Roth_IRA?

[michael]

I have an existing T-IRA as well as a Roth IRA....

When you say "have", does that mean you have a positive balance in the tIRA?

If so, have you dealt with the "Caution" mentioned in http://www.bogleheads.org/wiki/Backdoor_Roth_IRA?

Sorry, no, I mean it's just open. I have already contributed $5500 to it this year, and already done a 100% conversion to the Roth IRA. So the T-IRA has $0.00 right now :)

[MDM]

By the end of the year, I anticipate my annual salary will work to have been $90k or so ....

Ok, so too high for a tIRA, within bounds for a Roth, but you've already done the backdoor Roth so you don't have to do anything more for this year.

can I still convert the 401(k) to the T-IRA?

Yes

If yes, should I then backdoor-convert that to the Roth?

Completely up to you.  If you expect this year's $90K to be higher than subsequent years, converting now will cost you more in taxes.

For next year, I think I should open either a SEP or an individual 401(k). It seems I could contribute more to the individual 401(k), if I were making a lot of money, but I don't anticipate my self-employment income to be more than $50-60k or so at best. Is one of these options better than the other?

No firsthand knowledge here.  Maybe someone will provide that.  You could check https://investor.vanguard.com/what-we-offer/small-business/individual-401k, and perhaps get what you need from that site or call and talk with someone there.

Should I still work on the T-IRA and Roth IRA or does one of these exclude that option?

The tIRA and Roth IRA options are separate from SEP, SIMPLE, and individual 401k plans - so yes, take advantage of all you can.

[michael]

MDM,
Thanks for the help, really appreciated!

My only follow-up... Let's say next year or sometime in the future, I start getting an annual income too high for both the tIRA and the Roth again. If I move the 401(k) to the tIRA and want to contribute to it separately, then backdoor-convert the conversion to the Roth, is it feasible to be able to separate the annual tIRA contribution from the original 401(k) rollover? It seems to me it'd be easier to just move the 401(k) to its own separate tIRA account, and contribute to that tIRA only so long as I don't want to convert to a Roth. Thoughts on that idea?

[MDM]

Let's say next year or sometime in the future, I start getting an annual income too high for both the tIRA and the Roth again. If I move the 401(k) to the tIRA and want to contribute to it separately, then backdoor-convert the conversion to the Roth, is it feasible to be able to separate the annual tIRA contribution from the original 401(k) rollover?

No.  This is exactly the "Caution" issue noted above.  See the Bogleheads page and links therein, but the summary is "If you have any other (non-Roth) IRAs, the taxable portion of any conversion you make is prorated over all your IRAs; you cannot convert just the non-deductible amount."

Of course, that's not the worst problem to have.... :)

[terran]

Look into getting a self employed 401k.

To address the traditional vs backdoor Roth issue MDM has brought up look for one that allows incoming rollovers as that would let you move any traditional IRA's you have over into the 401k so you have a clean slate to start a backdoor Roth.

Here's some good information on different providers: http://whitecoatinvestor.com/where-to-open-your-solo-401k/

[Retired To Win]

The contribution limits for an SEP IRA are much, much higher than for the other types of IRAs.  So that's a definite advantage to take a look at if you are going to have a high savings rate.  With an SEP IRA, I believe you would be able to invest a lot more of those savings on a tax-deferred basis.

This would be very easy for you to verify at the irs.gov website.

Good luck.