Author Topic: Question about Solo 401k  (Read 1323 times)

Newazagod

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Question about Solo 401k
« on: September 24, 2014, 06:11:30 PM »
I am hoping someone can help with the following:

My wife currently does consulting work from home, only earning about 15k per year.  I have a 401k at my day job and max it out.

Can I incorporate my wife's side business, create a solo 401k for her, then use my day job income to max out her solo 401k?  We currently file jointly.

Or can I only contribute whatever her earnings are to her solo 401k? ( in this case, 15k)

Thoughts?

I'm basically trying to figure out a way to shelter more of our joint income (which is mostly from my job).  We both have iras already.

Thanks for any input.

JGB

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Re: Question about Solo 401k
« Reply #1 on: September 25, 2014, 02:48:10 PM »
You cannot exceed the $15k that she earned through the job. But you're not actually going to be able to stick the entire $15k in there either.

She still has to pay the ~15% tax for both sides of Social Security (and the related taxes). You can reduce how much of her earnings is taxable for this by having her first maximize the employer side of the contributions, which allow for 15-25% of the income to be contributed and deducted as a business expense before calculating how much she needs to pay for the SSN+related taxes. Exactly how much she can contribute varies a bit based on a lot of factors, so I'd recommend looking around to find out how to do the math, or taking it to your accountant so they can figure it out for you.

Assuming the total is $15k, then she'll pay in x% as a business expense/contribution, be subject to ~15% on the remaining (100-x)%, and be able to contribute as an employee for the amount left after both those taxes and expenses/contributions are taken out.

Ex: If your math/accountant revealed that the legal limit sets x at 20%. Then she'll do $3k as an employer contribution, pay 15% of $12k to social taxes ($1800), and then make a employee contribution of up to $10,200 (which, by her contributing it, is not subject to other income taxes).

Confusing enough for you?

Again, the answer to your first question is: No, you cannot use extra money from other sources to increase the contribution amount.

dandarc

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Re: Question about Solo 401k
« Reply #2 on: September 25, 2014, 03:02:43 PM »
You don't have to incorporate to use the Solo-401K, however to shelter any of it from FICA taxes, you would.  May or may not be worth it to you - corporations cost a little to keep up in most states, and there is a bit more hassle involved.

See the worksheet on page 22 of http://www.irs.gov/pub/irs-pdf/p560.pdf for the sole-proprieter version of these calculations - it is for 2013, but you'll be in the ballpark.