Monday, March 24, 2008

Update on self-employed 401(k) retirement plan

I blogged on Saturday about the possibility of setting up a self-employed retirement plan but wasn't sure about whether I could do a post-tax Roth plan. I pinged Fidelity and they responded today that they did not offer a Roth option for self-employed 401(k) accounts but that you could do it through a third party:

Fidelity's Self-Employed 401(k) does not allow for Roth contributions. However, you can use Fidelity as the investment vehicle for a Roth 401(k) plan provided by a third party. We recommend the following two companies that provide this service:

PenServ 903-455-5500
NPIN 800-443-6746 [National Pension & Insurance Network, Inc.]

These firms would provide you with the Roth 401(k) plan document, plan administration, and assist with tax reporting and filings. These companies are not financial institutions, but rather third party administrators. You would be directed back to Fidelity to open an account to hold your investments. We call this type of account a "Non-Prototype" which simply means you are using a prototype plan document provided by the third party. You can download an application by using the link below:

http://personal.fidelity.com/products/retirement/getstart/newacc/fidelity_nonprototype_plan.shtml

I have not pursued this any further or contacted those two firms, but either way, it does look promising.

Here is another thought I had: make pre-tax contributions in years when your income and tax bracket are higher, and then convert to a Roth account in any "off" years when your income and tax bracket are much lower.

I have been enamored by no-tax Roth accounts, but in truth a Roth account may only be beneficial when your tax rate in retirement is higher than your current tax rate. That may happen for some people, but I actually expect that my income level and hence my tax rate will be significantly lower than my current income and tax rate. Something to think about 

-- Jack Krupansky

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