Author Topic: Tax / Solo 401K Question  (Read 2452 times)

dandarc

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Tax / Solo 401K Question
« on: January 24, 2014, 03:21:55 PM »
I work on a contract basis and am paid monthly - at the end of each month I submit an invoice, my contract servicing firm process it, and then a few days later, the money is electronically deposited in my account.

So I got my 1099 for 2013 and it is exactly one month too heavy - my contract firm initiated the electronic transfer for December on 12/31/2013.  I didn't get the money in my account until January 4th, but for tax reasons apparently that money came in before the end of the year.

Not too worried about the taxes themselves - will pay more for 2013 and less for 2014.  What this throws a monkey wrench into, and has me rethinking is my investment strategy for 2014.

I opened the Solo K in 2012 and have been making Roth contributions since then.  I have since seen the light and will now be putting everything in on the Traditional side.  We paid the house off in December, so this year, we have much more money to invest. 

My grand plan with my income was to put 18.5% (this is just a bit under the theoretical maximum allowed - 20% of my income after deducting half of self employment tax - close enough for me) of my checks in the 401K on the employer side, then go with the following priority:

A.  Roth IRAs (11K)
B.  Employee side of solo K (17.5 K)
C.  Taxable account

Nice and clean, easy to implement.  Of course, I have already done the January transactions - 18.5% to the SoloK (checked 2014 - have asked if e-Trade can change that), swept the remainder to Roth IRAs.

However, this problem with some of my income unexpectedly moving back to 2013 has me thinking a better way to do this would be:

A.  Put all money into Solo K for 2013, until April, waiting to file taxes until then, or when we hit the contribution limit
B.  Roth IRAs
C.  Solo 401K for 2014
D.  Taxable Account (doubt we will get to this step, but there is a chance)

Does this make sense?  Would you file for an extension if we cannot fill up the 2013 money by April 15th?  We are due a small refund, so normally I would file as soon as all of our paperwork was in, but we could get a much larger refund by packing in as much into 2013 as we can.

dandarc

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Re: Tax / Solo 401K Question
« Reply #1 on: January 24, 2014, 03:38:48 PM »
Ran the numbers and I think I've answered my own question - will save about $7500 on taxes for 2013.  That's too much money to leave on the table for any reason.

Now to convince the wife this is a good plan . . .

iamlindoro

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Re: Tax / Solo 401K Question
« Reply #2 on: January 24, 2014, 03:55:08 PM »
Yup.  Have a pretty good spreadsheet that lets me simulate Solo 401k contributions + SE Income and having done that for the past year, I'll never fail to max out my 401k again.  You're paying someone, whether it's the government or yourself-- might as well make it yourself!

dandarc

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Re: Tax / Solo 401K Question
« Reply #3 on: January 26, 2014, 10:03:23 AM »
Heard back from E-Trade.  Guy said "Unfortunately, the deadline for 2013 contributions into an Individual 401k account is 12/31/13"

Then linked to a page that lists deadlines:

Employee deferral - 12/31/2013
Profit Sharing - 4/15/2014 (plus extensions)

Clearly the guy doesn't know what he is talking about, and his answer should have just been "No, we cannot reclassify the transaction after it has been processed." or something similar.

Question - does anyone know if this employee deferral deadline is a matter of law, or E-Trade policy?  I don't see how E-Trade can possibly know the split of employee vs. employer side in the Traditional Account.  The interface does not ask the question - it only asks for tax year.  And there's no way for them to know my income and make a determination off of that either.

It sure looks like I could make Roth contributions as well (which are by definition employee deferrals).  Interface let me set up a transfer today with the 2013 year (I scheduled it, then cancelled it).

If this Dec. 31 thing is the law, then I'll only fill up my Employer side for 2013.  If it is not the law, I'll have about $5500 in Employee side contributions I wasn't able to deposit before the end of last year as well.

Anyone know this answer?  I've been scouring publication 560 and have not found it yet.

Nash

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Re: Tax / Solo 401K Question
« Reply #4 on: February 20, 2014, 01:22:04 AM »
For 401(k) elective deferrals, you must elect to defer the money by 12/31.  So, you can't technically go back now and defer more of your 2013 income.  Generally, this means that the final payroll of a year includes your final deferral contribution of the year, but the actual deposit may not occur til January.  However, if an individual--doctors, dentists, etc. in my experience--elected to defer the maximum amount in a year and they did not deposit it during the year, they could theoretically deposit it into their 401(k) account by their tax filing deadline in the following year.  The key is having an election form or something on record stating their deferral election for the previous year.

In regards to employer contributions, the employer contribution has a longer deadline so as to give employers a chance to do their accounting and evaluate how the year went and what contribution they can afford to make--to put it simply.