Gyroscopic Investing

I'm discovering that there are more tax-deferred options than I ever realized...

First, somebody mentioned a "back-door" Roth IRA conversion, so I started checking into that.  I'm unable to contribute to a Roth because I am just barely over the limit, but it appears you can do it by funding a non-deductible IRA (limit $5K or $6K/year, depending on age) and then rolling it into a Roth (no income limit at least until Congress gets around to renewing the law).

The catch is that if you own any deductible IRAs, you'll have to pay taxes on a portion of the conversion.  I.e., if you have $5,000 in a deductible IRA and then contribute $5,000 to a non-deductible IRA with the idea of rolling that into a Roth, 50% of the conversion will be taxable.

So I checked into things a bit further, and found that rolling the deductible IRA into a 401K/403g would solve the problem.  I don't care for this option, because the plans available to me through my employer are not very PP-friendly.  But there is a way around that:  set up a solo 401K.  I do a bit of consulting on the side, so this could work as long as it's not time or cost-prohibitive.

It gets better though.  If I understood the rules correctly, a solo 401K is like a gift from heaven for a PP-er!  First, after maxing out my employer 403g plan, I can contribute up to 20% of my consulting income to the solo 401K.  Second, I could contribute the other 80% to the solo 401K, if I reduce the 403g contribution by an equal amount.  This effectively shifts money from a non-PP-friendly plan to a PP-friendly one.

So assuming I manage to pull all of this off, I'd get two expansions of tax deferred space ($5-6K/year in Roth contributions, 401K with extra few thousand/year) plus a shift of tax-deferred space that could make it possible to implement the PP for my entire retirement portfolio, instead of 60% of it.  And, it would just feel good to be able to reduce my otherwise prohibitive tax burden (living in NYC is like living in California twice, but without the nice weather).

Can anyone offer advice or reality checks before I pick up the phone and call Fidelity?

I have a Solo 401(k) with Fidelity. It's a sweet deal. At the time my accountant suggested it to me, I called Vanguard first because I had all my investments there. They said they didn't offer one yet. Fidelity said, "Yes, we don't call it a 'Solo', but we can set you up." And they did. After a small mix-up the first year, it's been smooth for 3 or 4 years now.

It seems too good to be true, but so far so good.

Good luck!

FYI, Vanguard now offers Solos as well.

Thanks!  It did indeed sound too good to be true.  I wish I knew about this years ago.

thanks Sophie for your idea!

Does this mean that dollar #1 through dollar #17,000 of self-employed income could be placed in the solo 401(k), as long as you don't fund a corresponding employee 401(k)?  Could you further specify how a solo 401(k) works?

If true, this Solo 401(k) account is a substantial extra benefit of entrepreneurship/self-employment.

see the Contribution Limits section at this wiki for the gist of it:
http://www.bogleheads.org/wiki/Solo_401k_plan

I'm thinking about opening a Roth 401(k) this year. My current accountant is not the one who thought up the solo 401(k) idea, and solos are new to him. But, he thinks I can put part of my overall contribution into a Solo-Roth. We'll see what happens.

A solo 401(k) plan can be a great tool.

Vanguard and TDA both offer these plans