The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: grignaak on May 27, 2014, 08:48:14 PM
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I just had a thought - and wondered if it was novel, prudent, or even feasible.
Let us say my wife and I do some post-retirement work, like MMM seems to do. For the sake of example, let's limit this to 25000 USD per annum. It appears to me that I could contribute this all to some Solo 401(k)s to eliminate tax on wages, and live off our investment returns which would basically be taxed at 0%.
In addition to skipping out on 500 USD of taxes, it puts more funds into tax-sheltered accounts.
Thoughts?
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You're going to pay the taxes on that money and the gains when you pull it out, so it's not exactly tax free, just tax deferred.
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Try it out on https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ (https://turbotax.intuit.com/tax-tools/calculators/taxcaster/). Enter $25,000 as long-term capital gains. 0% tax rate.
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You're mostly right. I have a side-business that my wife and I share. Last year nearly everything we made went into a solo 401k that we set up for the business.
There were a few things that we did not plan correctly:
1) You still have to pay social security and Medicare taxes. And you have to pay both sides (15% instead of the 7.5% you pay with a job). This is standard for any self-employed situation.
2) The employer side of the contribution is treated as a business expense (meaning #1 does not apply to the first 25% of what you make as long as you do it via the employer side). Thus the employer side should be maxed first.
3) Other business expenses will come out before taxes/profit are considered. So #1 does not apply here either.
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You're going to pay the taxes on that money and the gains when you pull it out, so it's not exactly tax free, just tax deferred.
Is there a way to get the funds from the Solo 401(k) to a TIRA then Roth IRA or directly to a Roth IRA? If so, it could be "pipelined" to the Roth in increments that would keep the rollover income shielded by deductions/exemptions.