Author Topic: Self-Employed: Options for max employer tax deductible retirement contributions?  (Read 1487 times)

AK

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Fellow Mustachians,

I am now self-employed and looking at different retirement options to maximize my pre-tax contributions. Based on the following info, what are my options?

Before I became self-employed, the 401K was maxed, my wife and i's IRAs were maxed, and our HSA was maxed. It's likely we will still be able to max them out still based on how business is going now. From my research so far, I am leaning towards a solo 401K because it allows for an employer contribution up to 35,000 for a combined limit of 53,000. The caveat is that the employer contribution is limited to 25% of the employee's compensation. As an s-corp, I don't want to have such a high salary because I will have to pay self-employment tax on it. The biz income will probably be around 150K and considering a salary around 50-60K.

Have also considered a Sep-ira to allow up to 12,500 to be contributed from the biz. Am still leaning towards a 401K though because of the possible mega-backdoor roth option too.

Miss Piggy

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Definitely talk to a tax professional before you decide. I'm no expert in this topic, but depending on how you are being paid and how you file your taxes, you may "have to" claim all of your revenue/income.

I have a solo 401k and it has been good for me. That said, my tax preparer has never asked me what I do and don't want to claim as income/paying myself. I just tell her that I want to contribute the max to my solo 401k (that's after maxing out an employer 401k as well), and she tells me how much I can contribute. Then I move the money.

Out of curiosity, have you researched companies through which you can open a solo 401k? At the time I opened mine, options were somewhat limited. One of the options was T Rowe Price, and since I already had an employer 401k there (which was doing well), I went with them. You may have more options today.

AK

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I am leaning towards starting an i401K with Vanguard since I am an index investor and have IRAs there too. Am shopping around too.

terran

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Both a solo 401k and a SEP have a $53k max, but you can hit that max on a lower income with the solo 401k (around $140k of w2 income vs $212k for your corporation) and at all incomes below that the solo 401k will come out ahead. At the $50k income level you'd be able to contribute $30.5k vs $12.5k. You might find playing around with this helpful: http://www.bankrate.com/calculators/retirement/self-employed-401-k-calculator.aspx

AK

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Terran, thanks for the calculator. Am checking that out now.

BlueHouse

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The sweet spot if you want to take the full $53K in tax-deferral is to pay yourself about $140K. Then you can put $18K as the employee and for the employer portion, 25% of $140k =$35K. For a total of $53,000. 
But if you're splitting that with your wife, and you won't have enough business income to cover that much, then you don't really have to worry about getting the 25% part to be enough to get to the whole $106K for both. 

So I would start with your expected business income and then figure out how much of that you want to go into a 401k (yours + wife).  Then work the numbers from there.