Author Topic: Help on starting a solo 401k or SEP IRA  (Read 2296 times)

Swat

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Help on starting a solo 401k or SEP IRA
« on: August 17, 2016, 05:26:44 PM »
I've just starting reading about solo 401k and SEP IRA's and want to try and take advantage of some of these opportunities.

Current situation: I am a medical resident who is currently maxing out hospital 401k, Roths, HSA, etc... I am starting to make some money on the side this year. At this point it is just surveys, but I'm hoping to begin moonlighting next year and possibly more money consulting when I am an attending. While my contributions this year will be minimal, every little bit helps and it will also allow me to understand the interworkings of each type of account and how to contribute.
-Expected $ from survey company 1: $1100
-Expected $ from survey company 2: $400
-Expected $ from survey company 3: $200

Questions:
1) Companies 2 and 3 state that with such low amounts of money (below $600), they won't even be sending in tax forms for the IRS. Do I still have to report it, and pending that response, will that $600 be factored into the solo401k/SEP or does it have to only be on the $1100.
2) Is it better to start a solo 401k vs SEP? My understanding is solo 401k is more work (paperwork, fees) but will allow you to do backdoor Roth and has other advantages over a SEP. While backdoor roth isn't needed this year, starting in 2018 it will be an issue.
3) What is the process you actually go through to contribute to each of these accounts? For instance, if I make $300 one month, $50 the next, then $0 the third month, how do I go about contributing? Do I just forward money from my bank account into my solo401k/SEP each month based upon how much I earn (I think 25%), wait until the end of the year, etc... For instance, do I just submit $75 for month one (300*0.25), $12.5 for month two (50*0.25), $0 for month three? Or do most people wait until the end of the year, add up all the checks received and then make one contribution?
4) Any best resources/books/forum posts that will help me walk through the step by step in how to do this?

Thank you.

bacchi

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Re: Help on starting a solo 401k or SEP IRA
« Reply #1 on: August 17, 2016, 10:07:03 PM »
1) Legally, yes, it has to be reported. If you do report it, you'll need to pay the SE tax on it.

2) Fido doesn't have any fees for their solo 401k. Vanguard is something like $20/yr if you have less than $10k in a fund. Paperwork is easy -- it's all boilerplate. If there's a new legal requirement, they send you the forms and you sign them and return them.

3) If this is 1099-MISC income, then it's 20%, not 25%. I always wait to the end of the year because I never know my taxable income until then, what with business deductions and all. You probably have a better idea because it's side income and most of your income comes from your "real" job. Yeah, you can contribute as the money rolls in.

Of course, the Vanguard funds have a minimum requirement. A solo at Fido might be better since you can micro-buy commission-free ETFs.

seattlecyclone

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Re: Help on starting a solo 401k or SEP IRA
« Reply #2 on: August 17, 2016, 10:11:55 PM »
Questions:
1) Companies 2 and 3 state that with such low amounts of money (below $600), they won't even be sending in tax forms for the IRS. Do I still have to report it, and pending that response, will that $600 be factored into the solo401k/SEP or does it have to only be on the $1100.

Yes, you have to report all of your income, whether there's a 1099 for it or not. Whatever you report on your tax return can be used to calculate your maximum contribution.

Quote
2) Is it better to start a solo 401k vs SEP? My understanding is solo 401k is more work (paperwork, fees) but will allow you to do backdoor Roth and has other advantages over a SEP. While backdoor roth isn't needed this year, starting in 2018 it will be an issue.

I think you have the gist. One other thing in favor of the 401(k) is that if you ever have a year where you don't have a 401(k) through another job you can contribute 100% of your first $18k to the solo 401(k). If you plan to have another 401(k) indefinitely, the two are equivalent in terms of contribution limits.

Quote
3) What is the process you actually go through to contribute to each of these accounts? For instance, if I make $300 one month, $50 the next, then $0 the third month, how do I go about contributing? Do I just forward money from my bank account into my solo401k/SEP each month based upon how much I earn (I think 25%), wait until the end of the year, etc... For instance, do I just submit $75 for month one (300*0.25), $12.5 for month two (50*0.25), $0 for month three? Or do most people wait until the end of the year, add up all the checks received and then make one contribution?

You can contribute at any point during the year. The sooner you get the money in there, the sooner it can get to work for you, so you might as well front-load it a bit if you're confident the income will come in later. Worst case you contribute a bit too much and have to make a corrective distribution.

Slow&Steady

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Re: Help on starting a solo 401k or SEP IRA
« Reply #3 on: August 18, 2016, 07:52:43 AM »
Can you contribute to both an employer 401k and a solo 401k in the same year?

seattlecyclone

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Re: Help on starting a solo 401k or SEP IRA
« Reply #4 on: August 18, 2016, 08:15:31 AM »
Can you contribute to both an employer 401k and a solo 401k in the same year?

Yes. However you need to keep in mind that the $18k employee contribution limit is shared amongst all 401(k) and 403(b) plans that you may participate in throughout the year. This doesn't stop you from making "employer" contributions to your solo 401(k). These can be 25% of your business income after self-employment taxes, up to $52k.

Slow&Steady

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Re: Help on starting a solo 401k or SEP IRA
« Reply #5 on: August 18, 2016, 08:29:16 AM »
Can you contribute to both an employer 401k and a solo 401k in the same year?

Yes. However you need to keep in mind that the $18k employee contribution limit is shared amongst all 401(k) and 403(b) plans that you may participate in throughout the year. This doesn't stop you from making "employer" contributions to your solo 401(k). These can be 25% of your business income after self-employment taxes, up to $52k.

Thank you, the bold part was what I was thinking and couldn't get past.  I was wondering what the benefit would be but I completely forgot about the "employer" contributions!