Author Topic: Solo 401k Question - Please help :)  (Read 4651 times)

starterstache

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Solo 401k Question - Please help :)
« on: March 01, 2015, 04:06:04 PM »
Hi Team Mustache!

Looking for a little advice on a solo 401k my wife setup for her LLC via Vanguard.  Two questions...

1.)  Her income is likely to be pretty low for the first year (~$6000-7000), and we are planning to deposit 100% of her income into the 401k as her employee contributions - obviously after we take the full small business taxes (~15.3%) out of the initial gross income.  Is there anything we need to factor into the equation on the 'employer' side of the contributions (up to 25%)?  I'm assuming that since she isn't contributing more than the maximum yearly amount as an 'employee', there would be no 'employer' match given she's already put 100% of her income into that account.  Can you confirm?

2.)  Do you have any recommendations for a good solo 401k fund through Vanguard?  Looking for a fairly aggressive return, so I'm assuming something like a large cap index fund would be a good choice.

Any other advice in my specific situation?

Thanks in advance for any advice!

Best regards,
Starterstache

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Re: Solo 401k Question - Please help :)
« Reply #1 on: March 01, 2015, 06:07:48 PM »
DH and I are in a similar situation. You worded your question well, so I'll be looking forward to the replies.

DH FIRE'd from the Rat Race in June 2013. His little micro-business on the side yields $8000-$10000/year after expenses. You're smart to withhold that 15.3%...it made an impact on our 2014 tax return. You definitely don't want to overlook that expense.

Currently, I put (almost) the max $17,400 into my 403b + we both fund our Roth IRA's fully.

I'm wondering, first off, if YOU max your pre-tax retirement contributions? Do you BOTH contribute to either Roth or Traditional IRA's? Are you creating/contributing to your wife's Solo 401 to keep yourself from bumping into a higher tax bracket?

We probably won't get to DH's 401k solo until I've fully maxed my 403b to $18,000 this year, AND find ourselves approaching the next tax bracket. Instead, we fund the taxable brokerage and college accounts.

DavidAnnArbor

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Re: Solo 401k Question - Please help :)
« Reply #2 on: March 01, 2015, 06:48:47 PM »
Just contribute whatever is left after the taxes are taken into account and call that your employee deduction. Why make it any more complicated? If the income were a lot more then you would have to think about calculating an employer contribution.

starterstache

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Re: Solo 401k Question - Please help :)
« Reply #3 on: March 01, 2015, 07:20:18 PM »
DH and I are in a similar situation. You worded your question well, so I'll be looking forward to the replies.

DH FIRE'd from the Rat Race in June 2013. His little micro-business on the side yields $8000-$10000/year after expenses. You're smart to withhold that 15.3%...it made an impact on our 2014 tax return. You definitely don't want to overlook that expense.

Currently, I put (almost) the max $17,400 into my 403b + we both fund our Roth IRA's fully.

I'm wondering, first off, if YOU max your pre-tax retirement contributions? Do you BOTH contribute to either Roth or Traditional IRA's? Are you creating/contributing to your wife's Solo 401 to keep yourself from bumping into a higher tax bracket?

We probably won't get to DH's 401k solo until I've fully maxed my 403b to $18,000 this year, AND find ourselves approaching the next tax bracket. Instead, we fund the taxable brokerage and college accounts.

Thank you for the response!  I'm hoping someone with more experience in solo 401k's will chime in soon.

Yes, we are already maxing most of our other pre-tax opportunities.  My 401k though my work is maxed out this year and we'll be maxing a T-IRA as well.  Tax brackets aren't a huge concern, but minimizing a general increase in taxes from higher gross income is the goal.

Ideally we want to put all the income from my wife's business into the solo 401k, providing her with a near 100% tax shelter outside of the small business taxes (medicare and SS).  The objective of her business is to accelerate our FIRE goal, given we've learned to live off my single income and still save significantly for some time now.

Good luck with your husband's business!

Thanks,
Starterstache

starterstache

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Re: Solo 401k Question - Please help :)
« Reply #4 on: March 01, 2015, 07:25:54 PM »
Just contribute whatever is left after the taxes are taken into account and call that your employee deduction. Why make it any more complicated? If the income were a lot more then you would have to think about calculating an employer contribution.

Thanks, that's helps confirm my assumption on the answer to my first question.  I suppose it's not complicated, but then all the other taxes and logistics around a small business are quite a hassle.  Just wanted to make sure I didn't overlook something :)

JGB

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Re: Solo 401k Question - Please help :)
« Reply #5 on: March 02, 2015, 07:56:08 AM »
In our slightly-larger side-business, my wife and I do employer contributions based on recommendations from our accountant to lower the overall amount that the business makes (and thus lower the amount on which we have to pay 15%). I don't think I'd feel comfortable sorting that out without an accountant though -- the benefits are small compared to the risk of doing it wrong IMO.

Currently 100% of our solo 401k is in VTSMX. That seemed like the closest option to VTSAX that we could find.

DavidAnnArbor

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Re: Solo 401k Question - Please help :)
« Reply #6 on: March 02, 2015, 02:28:06 PM »
In our slightly-larger side-business, my wife and I do employer contributions based on recommendations from our accountant to lower the overall amount that the business makes (and thus lower the amount on which we have to pay 15%).

If your side business is an S-corporation and taxed at corporate rates the first $50K in taxable income is taxed at 15%. I still think though you have to pay yourself a salary from the S-corp. I don't think the IRS wants you to say all the business income is corporate income and that there's no salary (as an end run way of not paying any of the payroll (medicare/Social Security) taxes). I agree it can get complicated. I personally have self-employed income and I'm not incorporated, hence all my net business income is subject to the payroll tax. By the same token it makes it easier to calculate the employee/employer contribution to the Solo 401(k).

Anomalous

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Re: Solo 401k Question - Please help :)
« Reply #7 on: March 02, 2015, 05:19:46 PM »
I just set up a One-Participant 401(k) (a.k.a. Solo 401k a.k.a. Self-Employed 401k) for myself. This is what I understand from the research I did prior to setting up the account, but please double-check before relying on this information.

I believe that the maximum contribution to the solo 401k (for both employee and employer combined) is limited to the profit of the business. So you not only have to take out any taxes, but also any business expenses incurred and anything else that would reduce the profit as calculated on the Schedule C form.

In our slightly-larger side-business, my wife and I do employer contributions based on recommendations from our accountant to lower the overall amount that the business makes (and thus lower the amount on which we have to pay 15%). I don't think I'd feel comfortable sorting that out without an accountant though -- the benefits are small compared to the risk of doing it wrong IMO.

I don't think this applies to the One-Participant 401(k) plans, because they're treated differently than regular 401ks. The solo 401(k) plans deduct both employee and employer contributions in the "Adjusted Gross Income" section of the owner's 1040 form as "Self-employed SEP, SIMPLE, and qualified plans", none of it shows up on the Schedule C. At least that's what I've read; since I just opened my own solo 401k, I haven't filed income taxes for that plan type yet. I do know that my past SEP-IRA contributions, which are similar to the employer side contributions in a solo 401(k), show up on the 1040 and not the Schedule C.

Anomalous

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Re: Solo 401k Question - Please help :)
« Reply #8 on: March 02, 2015, 05:38:46 PM »
I forgot to add in my previous post: For the purpose of calculating the maximum employer contribution, you only have to subtract 50% of the self-employment taxes, not 100%. Reference IRS publication 560 for details. I assume that this same rule applies to calculating the maximum overall contribution (employee and employer combined), but I'm having trouble finding a reference on that. If this is correct, I believe the maximum contribution is (business gross income) - (business expenses) - (50% of self-employment tax.)

bacchi

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Re: Solo 401k Question - Please help :)
« Reply #9 on: March 02, 2015, 10:05:56 PM »
If this is correct, I believe the maximum contribution is (business gross income) - (business expenses) - (50% of self-employment tax.)

Correct. There are some solo 401k calculators that are helpful. Use 2-3 and make sure they agree.

DoNorth

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Re: Solo 401k Question - Please help :)
« Reply #10 on: March 03, 2015, 05:45:10 AM »
I started with VTSMX and added VTRIX later based on our overall allocations.  Once you file the initial paperwork, you can call Vanguard and they can manually add funds to the plan.

We used this calculator:  http://solo401k.bcmadvisors.com/calculator.html

Generally for a sole proprietor, you can deduct 1/2 of SET to arrive at the figure for the individual tax deferred contribution.  At $7K of income, ($989 of SET) you can contribute $6505.

DavidAnnArbor

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Re: Solo 401k Question - Please help :)
« Reply #11 on: March 03, 2015, 08:25:19 PM »
My understanding with Vanguard's Solo 401(K) is that you can't invest in the admiral share class of index funds, but you have to use the higher fee investor share class. For that reason I chose to go with Fidelity where they offer a total stock market index fund that has the same low expense ratio as the Vanguard admiral share class version.