Question about Thrift Savings Plan (TSP)

[Andy]

Hello, so I'm active duty in the Navy, but will be transitioning to a civilian job while staying the reserves. I have been maxing out $18k per year in a Roth TSP as well as $5500 in a normal Roth for myself and my wife through Betterment. When I get out and into the Reserves, soon, my main job will be a 1099 job, but I'll still get a W2 from the Reserves. I'm still going to max out the $18k in my TSP if I can, but my question is, will I be able to also max out a solo401k at $53k per year and a backdoor Roth for both myself and my wife, or would that $18k from the TSP count against the max I could put into a solo401k?

Thanks!

 

[Matt]

Hello, so I'm active duty in the Navy, but will be transitioning to a civilian job while staying the reserves. I have been maxing out $18k per year in a Roth TSP as well as $5500 in a normal Roth for myself and my wife through Betterment. When I get out and into the Reserves, soon, my main job will be a 1099 job, but I'll still get a W2 from the Reserves. I'm still going to max out the $18k in my TSP if I can, but my question is, will I be able to also max out a solo401k at $53k per year and a backdoor Roth for both myself and my wife, or would that $18k from the TSP count against the max I could put into a solo401k?

Thanks!

Hey Andy,

Good to see you around.

You can't do $53K into the 401(k) but you could employer contribute. The $18K limit is aggregated between 401(k) and TSP accounts, so if you max it in one, you max it in all. However, the employer side ($35K, 25% salary permitting) can be replicated in different retirement accounts, including multiple 401(k) and TSP accounts.

The caveat for the multiple accounts is that the businesses must be substantially different. It probably will be in this case.

Backdoor roths will be OK, unless the IRS thinks you are conducting activity that involves Step Doctrine. That isn't specific to your case, just for any Backdoor Roth.. IE they are always YMMV.

 

[Andy]

Matt, thanks for the reply!

Interesting. So I'd contribute $18k to TSP, which I'll definitely do because the cost is like 0.03%, but then, for the different 1099 business, how would I have an employer contribution without any personal contribution? I assume I'd have to incorporate, and then set up a solo 401k (please correct me if I'm wrong, I just started reading about this), but I thought the employer contribution had to be matched to something.

 

[Matt]

Matt, thanks for the reply!

Interesting. So I'd contribute $18k to TSP, which I'll definitely do because the cost is like 0.03%, but then, for the different 1099 business, how would I have an employer contribution without any personal contribution? I assume I'd have to incorporate, and then set up a solo 401k (please correct me if I'm wrong, I just started reading about this), but I thought the employer contribution had to be matched to something.

The employer contribution is related to income/salary of the employee, rather than their own contribution amount. Most jobs might pick a funny number, like 3% match of what the employee does, but the way this really works is that you can add up to 25% of an employee comp if you run a payroll. You can also schedule C the 401(k) but many 1099ers will do better with incorporating and paying the salary.

 

[Andy]

Oh ok gotcha. What would be the advantage of incorporating?

Also, any advantage of a solo 401k over a SEP IRA? The only one I can think of off the top of my head is, if I have a SEP then I can't do a backdoor Roth. Anything else? (I need to reread your explanatory post!)

 

[Matt]

Oh ok gotcha. What would be the advantage of incorporating?

Also, any advantage of a solo 401k over a SEP IRA? The only one I can think of off the top of my head is, if I have a SEP then I can't do a backdoor Roth. Anything else? (I need to reread your explanatory post!)

Incorporating can lower taxes if the income is sufficient to make it work. Not much difference between the two other than what you mention here.

 

[ZipZapKaZoom]

Before incorporating make sure you're the type of person who can stay on top of all the additional paperwork. I've incorporated myself three times for different businesses and after each time I've wondered why the hell I did it.

 

[Andy]

Thank you both!