Author Topic: Individual 401k for side hustle money?  (Read 10785 times)

DocCyane

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Individual 401k for side hustle money?
« on: August 02, 2014, 06:40:11 AM »
This year I will make about $3000 in a side hustle and I am wondering if it is best to use this income to open an Individual 401(k) with Vanguard.

I would like to avoid the tax monster, but I'm not certain I will have more income in future years to add to the fund.

Your thoughts are appreciated.

whiskeyjack

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Re: Individual 401k for side hustle money?
« Reply #1 on: August 24, 2014, 07:26:28 PM »
I don't have an answer for you but I thought I'd reply and bump this up since I am also just starting to research if an Individual 401(k) would be a good idea for me.   I'm bringing in about $13k per year and was thinking that putting that into a pre-tax account could bring our overall tax rate below the 15% level.

Ybserp

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Re: Individual 401k for side hustle money?
« Reply #2 on: August 24, 2014, 07:33:16 PM »
I'm thinking about setting up an individual 401k also.

Willbrewer

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Re: Individual 401k for side hustle money?
« Reply #3 on: August 24, 2014, 07:57:14 PM »
I plan to set up a Solo 401k also. I will have roughly $15k from my side-job that I can contribute to a plan by year's end. Here are a couple of links I found helpful.

http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans

http://www.irs.gov/Retirement-Plans/Self-Employed-Individuals-Calculating-Your-Own-Retirement-Plan-Contribution-and-Deduction


DocCyane

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Re: Individual 401k for side hustle money?
« Reply #4 on: August 24, 2014, 08:37:03 PM »
I wrote to Vanguard and got this information. Hope it helps.

Dear DocCyane:

Thank you for taking the time to contact us. The Vanguard i401(k) Plan
would be appropriate for you, as long as you do not have any common law
employees. It really is for owners, spouses, and partners. Assuming this
fits you, below you will find the details of our i401(k) Plan.

To answer your questions, the fund minium for any of our $3,000 funds is
waived for the Vanguard i401(k) Plan. You can start with any amount. You do
need to have the plan established by December 31, 2014 if you are making
contributions for 2014. You do not have to fund the account by December 31,
2014, but you do have to have the plan established. You have up until your
tax filing deadline to make contributions to the plan.

The VanguardŽ Individual 401(k) Plan is easy to manage and allows
small-business owners and their non-common law employees or self-employed
individuals to make significant tax-deductible contributions to retirement
accounts. The program is offered at no cost to an employer.

For additional information about individual 401(k) plans, refer to IRS
Publication 560, Retirement Plans for Small Business, available at
www.irs.gov.

Establishing an Individual 401(k) Plan at Vanguard >>

You can establish a plan by completing the forms in our Individual 401(k)
New Account Kit, which is available online through the following link:
https://personal.vanguard.com/us/literature/search?searchInput=S571&search_mode=true


How to contribute >>

You can make contributions online through Vanguard Small Business OnlineŽ,
our website for small businesses and nonprofit organizations. You can also
use the site to view, update, and submit your plan's contribution data,
participant information, and bank information.

You can view and register for the site through the following link:
http://smallbiz.vanguard.com

Contribution limit >>

The elective salary deferral limit is $17,500 for 2013 and 2014.
Participants age 50 or over may elect to defer an additional $5,500 (for a
total of $23,000). Elective deferrals also cannot exceed 100% of
compensation. If your plan allows, participants may designate these
contributions as pre-tax or after-tax (Roth). The elective deferral limit
is the maximum amount you may contribute among all of the Individual 401(k)
plans in which you participate in a given year, including Individual Roth
401(k)s.

Employer contributions of up to 25% of an employee's compensation--not to
exceed $51,000 for 2013 or $52,000 for 2014--may be made each year to each
employee's Individual 401(k). Employer contributions are discretionary,
which means that employers may change their contribution percentage from
year to year or even skip years. Note that the same percentage must apply
to each participant's Individual 401(k) Plan account.

Participant account access >>

Participants who are registered for online access can view their accounts
at www.vanguard.com. They can also accomplish these tasks by calling us at
888-285-4563.

Account fees >>

Participants are charged an annual account service fee of $20 for each
mutual fund they hold in their Vanguard Individual 401(k) Plan account.
This fee cannot be prepaid and will be deducted from the account in June.

You can get more information about our retirement plans, funds, and
services, as well as access our Individual 401(k) New Account Form, through
the following link:
https://personal.vanguard.com/us/whatweoffer/smallbusiness

If you have additional questions, please call Vanguard at 800-376-9162.
Specialists are available on business days from 8 a.m. to 7 p.m., Eastern
time.

Sincerely,

Jim Connolly
Registered Representative
Vanguard Concierge Services

Ybserp

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Re: Individual 401k for side hustle money?
« Reply #5 on: August 25, 2014, 12:19:11 PM »
Thanks DocCyane. That is quite helpful!

whiskeyjack

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Re: Individual 401k for side hustle money?
« Reply #6 on: August 25, 2014, 12:44:18 PM »
It does help DocCyane, thanks.   Did you decide to go for it?

DocCyane

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Re: Individual 401k for side hustle money?
« Reply #7 on: August 25, 2014, 01:26:02 PM »
I passed out on the paperwork. There are quite a few pages. But I'm nearly done and then I can send it in. Yes, I'm totally going for it.

dandarc

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Re: Individual 401k for side hustle money?
« Reply #8 on: August 25, 2014, 01:51:05 PM »
Just remember that you get one 17,500 (for 2014) employee deferral for all of your 401ks, 403bs, and such combined.  If you are working for an organization that offers it, a 457 plan gives you another 17,500.  And of course you can contribute to IRAs in addition to all of this.

The Solo 401k allows you to shelter more money at incomes below 250K or so than a SEP-IRA because of the employee deferral limit - if you can't take advantage of the employee deferral side (maybe you've already maxed a 401K at a day job), then the SEP-IRA is just as good and I'm told has less paperwork.  And if you are eligible to deduct but haven't contributed to a traditional IRA for the year, that's an option as well, with probably the least amount of hassle.

Ybserp

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Re: Individual 401k for side hustle money?
« Reply #9 on: August 25, 2014, 01:56:10 PM »
I know Roth and Traditional IRAs have the same limit... Meaning if contribute $5.5k to a specific Traditional IRA account for 2014, I'm allowed $0 contributions in any other IRAs. "Any other" IRAs also includes SEP IRAs, right?

dandarc

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Re: Individual 401k for side hustle money?
« Reply #10 on: August 25, 2014, 02:11:52 PM »
I know Roth and Traditional IRAs have the same limit... Meaning if contribute $5.5k to a specific Traditional IRA account for 2014, I'm allowed $0 contributions in any other IRAs. "Any other" IRAs also includes SEP IRAs, right?
You can contribute to a SEP IRA as well as a Traditional / Roth:  http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions

So, no, "Any other" IRAs does not include a SEP-IRA for the purposes here.  Your government at work naming these things.

jzb11

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Re: Individual 401k for side hustle money?
« Reply #11 on: August 25, 2014, 02:33:41 PM »
You need to have an actual TAX ID number for a individual 401K. Otherwise you should be able to open a SEP with your SSID.

dandarc

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Re: Individual 401k for side hustle money?
« Reply #12 on: August 25, 2014, 02:41:14 PM »
You need to have an actual TAX ID number for a individual 401K. Otherwise you should be able to open a SEP with your SSID.
Not true.  Many (probably most?) Sole proprieters with no employees operate under their own SSN.  If you have a separate entity (LLC, partnership, corporation), then you would have to have a separate FEIN for that entity (regardless of if you have a 401K or not through the business).

jzb11

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Re: Individual 401k for side hustle money?
« Reply #13 on: August 25, 2014, 03:12:04 PM »
I tried to open an individual 401k with vanguard and this is what they told me.

dandarc

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Re: Individual 401k for side hustle money?
« Reply #14 on: August 25, 2014, 03:32:25 PM »
I opened one with E-Trade under my Social - maybe it is a Vanguard specific thing.

MustardTiger

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Re: Individual 401k for side hustle money?
« Reply #15 on: August 25, 2014, 03:42:50 PM »
I recently opened an i401k for my gambling winnings.  I needed to get an EIN from the IRS and then fill out quite a bit of paperwork, but it was fairly easy.

dandarc

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Re: Individual 401k for side hustle money?
« Reply #16 on: August 25, 2014, 04:20:44 PM »
jzb11 - looks like you / Vanguard are right on this one.

I'm surprised the IRS website is not clearer on this.  They have god-knows how many pages about individual 401Ks and not one I've found says "You have to have an EIN."

Looked at a 5500 that you have to file once the plan reaches $250K - it does indeed say that this is not to be your SSN.  So I guess I will be getting one.

Any way, thanks for the heads-up jzb11.  I did ask this question when I opened the account and the E-Trade guy said I could use my SSN (and they did open the account).  Haven't had any problems sent to my attention, but best to be proactive.  Will be looking into this further.  Luckily getting an EIN is not difficult - happens in a matter of minutes on the IRS website.  I'm just wondering if I have to now get revised 1099s for prior years to use that EIN instead of my SSN.

MustardTiger

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Re: Individual 401k for side hustle money?
« Reply #17 on: August 25, 2014, 08:33:53 PM »
getting an EIN is really easy, just go to IRS website.  Took me 5 minutes.

Researcher

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Re: Individual 401k for side hustle money?
« Reply #18 on: August 26, 2014, 11:46:00 AM »
I know Roth and Traditional IRAs have the same limit... Meaning if contribute $5.5k to a specific Traditional IRA account for 2014, I'm allowed $0 contributions in any other IRAs. "Any other" IRAs also includes SEP IRAs, right?
You can contribute to a SEP IRA as well as a Traditional / Roth:  http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions

So, no, "Any other" IRAs does not include a SEP-IRA for the purposes here.  Your government at work naming these things.

This is not correct. In the link it states that an SEP-IRA is a traditional IRA. The only difference is that your employer (in this case, yourself) can contribute to it also. You can contribute to all of them, but the limit of $5,500 that an employee can contribute does include SEP-IRAs in addition to traditional and Roth. Any contributions made over that need to be contributed as an employer match, so just make sure you're designating your contributions correctly.

Ybserp

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Re: Individual 401k for side hustle money?
« Reply #19 on: August 26, 2014, 12:00:15 PM »
Researcher - Scroll down and keep reading in that same link. Dandarc has it right. One account (if permitted by the financial institution) can hold both SEP IRA contributions and Traditional IRA contributions, but the allowed contributions per year are different.

whiskeyjack

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Re: Individual 401k for side hustle money?
« Reply #20 on: August 26, 2014, 08:32:35 PM »
If I'm reading these right it sounds like you can contribute up to the lesser of 25% of compensation or $52,000 to an SEP-IRA acting as the employer (even if you are self employed) and then you can also make contributions as the employee, but those would deduct from the amount you can contribute to another IRA (either Roth or Traditional).

Since my side-income is very low, that would be a pretty major cap on how much I can contribute and I'm already contributing the max to a Roth IRA.

Going the solo-401(k) route you can contribute up to $52,000 or 100% of compensation (whichever is lower) and this won't impact the amount you can toss into an IRA.

If my side income were much higher the SEP-IRA might be a good idea, but with my low numbers the 401(k) sounds better.

Ybserp

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Re: Individual 401k for side hustle money?
« Reply #21 on: August 27, 2014, 05:03:04 AM »
The time cost of a SEP IRA seems to be bill. But the time cost of a Individual 401k seems to be filing a Form 5500 with the IRS by the end of the seventh month of the plan year, generally July 31st for calendar year plans. It looks like you owe a Form 5500 no mater what for the last year of the plan when the i401k gets emptied and also for every year once the balance in the i401k account reached $250,000.

For a small side job, the balance might never reach $250,000. But then again it might. I think I'm going to start a Roth i401k with Vanguard and try to put a couple thousand or more in a year. I think this may require that I have an agent in my declining years to do financial things on my behalf. But I figure if I can't at that point afford that level of help, I can get the money out and get the Form 5500 done just once.

This choice does feel a bit like financial lifestyle creep. Before stock ownership and property ownership and having income-producing jobs, my financial situation used to be so much simpler. But if I need to pay a CPA from time to time to ensure I remain on the right side of the tax law, I think I'm okay with it. The Form 5500 isn't a lot. It is just one more thing. And from my Excel spreadsheet it is one more thing that isn't likely to start until my 60s or 70s.

Researcher

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Re: Individual 401k for side hustle money?
« Reply #22 on: August 27, 2014, 12:03:51 PM »
Researcher - Scroll down and keep reading in that same link. Dandarc has it right. One account (if permitted by the financial institution) can hold both SEP IRA contributions and Traditional IRA contributions, but the allowed contributions per year are different.

Sorry, I am not seeing this. Can you point this passage out to me? Or maybe we're just misunderstanding each other...

I understand that you can make employer contributions up to 25% of compensation in an SEP-IRA and that does not affect the amount that you can contribute as an employee; but I believe it states the amount contributed by the employee is limited to the $5.5k which can be held in the same account as the SEP-IRA, but is categorized as a Traditional IRA.

Am I missing something or are we on the same page here? I am still on the fence about which to open up for my side income too, so this might sway me.

Thanks!

Ybserp

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Re: Individual 401k for side hustle money?
« Reply #23 on: August 27, 2014, 01:30:46 PM »
Researcher - Scroll down and keep reading in that same link. Dandarc has it right. One account (if permitted by the financial institution) can hold both SEP IRA contributions and Traditional IRA contributions, but the allowed contributions per year are different.

Sorry, I am not seeing this. Can you point this passage out to me? Or maybe we're just misunderstanding each other...

I understand that you can make employer contributions up to 25% of compensation in an SEP-IRA and that does not affect the amount that you can contribute as an employee; but I believe it states the amount contributed by the employee is limited to the $5.5k which can be held in the same account as the SEP-IRA, but is categorized as a Traditional IRA.

Am I missing something or are we on the same page here? I am still on the fence about which to open up for my side income too, so this might sway me.

Thanks!

We might be in violent agreement. But just in case we're not, here's the relevant example from IRS.gov.

From http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions
If I participate in a SEP plan, can I contribute to a Roth IRA in addition to receiving contributions under the SEP plan?

A SEP-IRA is a traditional IRA... [cut]

Example (2):  Nancy, age 45, is the owner and sole employee of JJ Investment Advisors. Nancy contributes the maximum allowable amount to her SEP-IRA for 2013, or $50,000. Nancy may also make regular, annual IRA contributions to her SEP-IRA, if her SEP-IRA allows this, or contribute to her Roth IRA at XYZ Investment Co.  Her total traditional IRA and Roth IRA contributions cannot exceed $5,000 for 2013 and may be made in addition to her SEP contributions.

Researcher

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Re: Individual 401k for side hustle money?
« Reply #24 on: August 27, 2014, 07:53:22 PM »
Violent agreement it is. Thanks! :)