Author Topic: Individual 401(K)  (Read 800 times)

SoCal

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Individual 401(K)
« on: July 20, 2013, 07:32:48 PM »
I have become a sole proprietor in 2013.  Hourly consultant, 1099, am not incorporating.

Few questions:

1.  I assume that the ongoing backdoor Roth contribution strategy will still be possible, even with a large pre-tax balance in my new I401(K).  The reason I ask is because I intend to convert my corporate 401(K) balance into my new Schwab I401(K) because of the better investment choices with Schwab. I want to make sure that I have no reason to regret moving it out of the corporate 401(K) account, and closing off the post-tax traditional IRA contribution with immediate rollover to Roth IRA would certainly be undesirable.

2.  How do I physically make my $17,500 in employee deferral contributions? My customer just pays me via check once a month in the gross amount of my invoice.  So, I get no payroll check where a normal employee deferral contribution would be withheld.

3.  I assume I should wait until March or so when I file my 1040 to make the employer contribution of up to $33,500.

4. With few business expenses, maybe $2500, and assuming ~$10,000 one-half self employment tax, I assume I need to bring in ~$180,000 in gross revenues to make a maximum $33,500 employer contribution (20% of $167,500).   

« Last Edit: July 20, 2013, 08:19:25 PM by SoCal »

matchewed

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Re: Individual 401(K)
« Reply #1 on: July 22, 2013, 11:11:49 AM »
I'm no expert and I've only briefly discussed this with a friend who is doing one through his business so I don't feel confident in any advice I'd have towards your questions. I would just go straight to the source - http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans

SoCal

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Re: Individual 401(K)
« Reply #2 on: September 14, 2013, 10:16:25 AM »
I have opened my Schwab I401(K) and thought I'd come back to answer my own questions in case others might be interested.

1.  All my research leads me to believe that pre-tax I401(K) balances are not treated as pre-tax IRA dollars, for the purpose of determining the tax amount during a traditional to Roth IRA conversion.  This means having a large pre-tax I401(K) balance does not harm an ongoing Roth backdoor contribution strategy.

2.  Don't know about employee deferral contributions until 2014, but the employer contributions have been super easy with Schwab.  I just move the employer contribution into my Schwab brokerage account and send a Schwab.com message to move the funds from the brokerage account to my I401(K) account, labeling the funds as "employer contribution".  Very easy.

3.  I started my employer contributions at the rate of 15% of each incoming payment from my client. I'll true up to 20% of my net taxable income in early 2014 when I file my 1040.

Overall, Schwab has been brilliant & painless.  Very short application process.  Full access to stocks, mutual funds, and no-transaction-fee ETFs.  So much better than Vanguard, whose application was literally over 100 pages, does not allow incoming transfers, and restricts investments to Vanguard mutual funds.