Making 401k contributions from side-job

[johnmyster]

I joined the corporate workforce in 2014 at the age of 33.  Previously, my small business income was worth about 50k a year, with roughly half being W2 employee earnings and the other being 1099 Sec C income as a sole proprietor.  Now, I'm at about 75k and the side job is closer to 6k net after deductions.  I'm able to max out the personal contributions on the employment front.

I have about 130k in fairly liquid investments and cash plus 20k or so in the 401k and another 20k in the Roth IRA.  Aside from the 401k and IRA contributions, I'm able to save around 30k per year.  Largely, I pay too much in rent, but hope to purchase an inexpensive home this year to fix this.

Could/should I leverage my small business income as additional 401k contributions?  The internet offers plenty of how-to for individuals who are fully set up as small businesses, but what about for a side income stream?  I may be able to further increase my side income if I can realize some savings benefit to doing so.  Right now the tax liability makes it less of a priority.

Furthermore, my company has a fairly restrictive 401k contribution level for those who are "highly compensated" individuals (over 125k.)  It'll take quite a few years to get there, but I may want to keep this in mind as a strategy to avoid restricted contributions in this case.  Any input on this scenairo?

[MDM]

Have you tried searching the internet for    individual 401k for a side business  ?

[maizefolk]

I can't answer "should" but after spending way WAY too long investigating this for my own purposes I can talk about "could."

If you're already maxing out your work 401K at 18,000 this year, you can't contribute additional money to a 401k through your side business as an employee of the business. Each person gets one $18,000 limit that's shared across all the 401k plans you participate in this year.

However, as your own employer, you can make matching contributions to a 401k on behalf of your sole employee (yourself). Unfortunately employer contributions are capped at 20% of total compensation for the self employed (actually a little less once you factor in the way self employment taxes factor into the calculation of net income) so with 6k in net self employment income you are looking at only another $1,200 in tax differed savings.

[Able was I ERE]

Go with a SEP IRA initially.   You get the same employer contribution limits, but with less complexity---Vanguard lets you open a SEP IRA online via your individual account, but requires a paper application for the 401k (and a different, "small business" login IIRC).  You can change to a solo 401k when/if you can no longer max out your 401k with your current employer.

There is a small possibility you could set up and contribute for the 2014 tax year (deadline to set-up and contribute is tax filing deadline plus extensions).  Not sure whether you can still file an extension for your filing deadline.

To see how much can contribute, use this retirement plan contribution calculator.   Keep in mind that the 401k calculations assume that you don't already max out your individual contribution limit with your day job's 401k.