Hi Everyone,
I'm having trouble understanding solo 401Ks and the tax implications. As some background, I work full-time for a consulting company as an employee (benefits, etc) and my wife and I co-own a small consulting company (side business). I currently earn around 110K in my day job, and currently max out my 401K and IRA (Roth). My wife also contributes to a traditional IRA. Currently the only employees of the LLC are my wife (owner) and I (employee) although we sometimes have paid other consultants for larger jobs, but none this year so far. The part-time business usually earns around 50K-65K per year gross (We have very little overhead since it is software consulting). We also own a rental that brings in about 18K per year (net probably 2000K, not great). Because of this we have worked with an accountant that setup the business to pay taxes quarterly as part of the LLC, my wife is also paid a "salary" in this setup for payroll purposes. We also take the usual deductions on the rental for depreciation, write-offs, etc.
Last year we opened a Vanguard solo 401K for the business towards the end of the year, and decided to start small and add 5500.00 to it. After doing this we called our accountant and told him, but he was kind of pissed that we didn't ask him first and we ended up paying more in taxes due to the way the business was structured. He said something about the amount of taxes we pay quarterly were not setup for a solo 401K contribution so it was going to cause issues at the end of the year. At the end of the year he was right and we had an additional tax bill for around $700.00 that we would not have had otherwise if we would have just invested the money in a taxable account (I'm assuming?).
I'm having trouble understanding how this could be the case? I just figured if we contributed more money to the individual 401K that it would mean we would pay less taxes per year because our taxable income would be less. Does anyone know why this would have happened?
Thanks in advance!