Beating The $53k Maximum SoloK Contribution With Side Business

[mr_orange]

I was wondering if anyone on the forum has:

1.  A full time W2 where they don't control the company they work for
2.  One (or more) businesses they own that produce considerable income that have been adopted by their SoloK

My wife and I are high income earners and are looking to:

3.  Minimize taxes
4.  Fund both traditional and Roth IRA accounts for post-FI withdrawals.  We'd like to take the 72(t) distribution later if possible so presumably the Roth money would be the "gap" money between FI and drawing from our traditional IRA or SoloK later on

My understanding based on research in the articles below and elsewhere online is that we can fund BOTH of these accounts if we have a W2 and a SoloK. 

http://www.investopedia.com/articles/retirement/05/commonquestions.asp
http://www.tpagroup.com/forms/faqs.html

So I'm thinking we could fund ALL of these items in a given calendar year to fast-track FI:

1.  Me - Fund $17.5k to Roth 401(k) at employer; match ~4%
2.  Wife (She works too) - Fund $17.5k to Roth 401(k) at employer; match ~4%
3.  Fund $53k for me in SoloK for our real estate development business
4.  Fund $53k for DW in SoloK for our real estate development business

The incomes for this year will probably be:

5.  Low $200kish combined W2
6.  Around $300k from "side hustle" (yes....the income is high, but it may not be there forever...cyclical business)

If items 1-4 are correct we could potentially stuff $141k in tax-advantaged accounts this year.  Items 1 and 2 would help with gap money and items 3 and 4 would help with 72(t) money later in life.  Thus we'd be contributing more than the combined SoloK limits of $106k in tax year 2015 for my wife and I combined. 

Has anyone done this?  Any ideas?  My accounting firm seems to be a bit cautious about this and they probably don't have many clients with this situation so we're a bit of a corner case. 

[mr_orange]

After many thread entries back and forth my accountant and I figured it out.  Here is the IRS snippet for anyone interested:

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-401k-and-Profit-Sharing-Plan-Contribution-Limits

The annual additions paid to a participant’s account cannot exceed the lesser of:
1.       100% of the participant's compensation, or

2.       $52,000 ($57,500 including catch-up contributions) for 2014 ($53,000, or $59,000 including catch-up contributions for 2015).  There are separate, smaller limits for SIMPLE 401(k) plans.

Example 1: Greg, 46, is employed by an employer with a 401(k) plan and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer’s 401(k) plan for 2014, $17,500. Greg would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $17,500. He has enough earned income from his business to contribute the overall maximum for the year, $52,000. Greg can make a nonelective contribution of $52,000 to his solo 401(k) plan. This limit is not reduced by the elective deferrals under his employer’s plan because the limit on annual additions applies to each plan separately.

I hope this helps some folks save some dough.  If you're working and your side business makes enough money you can stache $141k in tax-advantaged accounts in 2015 using this strategy. 

[iamlindoro]

Same article says:

Compensation limit for contributions

Remember that annual contributions to all of your accounts - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts - may not exceed the lesser of 100% of your compensation or $52,000 for 2014 and $53,000 for 2015. In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $260,000 in 2014 and $265,000 in 2015.

Edit: Hmm, I see a few ways to interpret it.  I hope you are right!  What is definitely true is that they don't have to abide by what the publications say, so I'd probably want to dig deeper to find actual defensible tax law to support what you want to do.  As it stands I can't quite max my Solo 401(k) this year, though I am close.  Perhaps I'll have an opportunity in a few years and you can let us know if you run into any trouble.

[mr_orange]

KKOS in LA and Utah generally knows this stuff pretty well.  If I get blow back from my CPA about it I'll do the case law study.  If anyone is a wizard with this stuff and knows the actual case law please do share!

This is a pretty big deal for those with high incomes.  It allows you to get more dough in tax-advantaged accounts. 

[mr_orange]

Oh....and note the limit for 2015 is apparently $18k now; not $17.5k.  So there is another $1k if you have a significant other. 

[Midwestache]

I too am interested in this topic. Did you have a way of setting up your own 401K? I have a rental that we could use to supplement the income. We are currently maxing out my 53K pretax in retirement. My wife has a work related 18K a year retirement fund we are contributing to. However I did not know of a way to add more pretax money for her.

So would the steps be to create our own 401K? I thought an institution needed to make this. Then how do we put money into this legally?

Any suggestions would be appreciated from who have done this before.

[mr_orange]

The Naber's Group and Sunwest Trust each have SoloK options.  When I was setting mine up those were the two horses to pick from.  The Naber's group carries a monthly fee, but you get support with it.  Sunwest Trust basically just sells you the documents; or at least this was how things were several years ago when I set mine up. 

The trickiest part is finding a lender that knows how to set the bank account up.  We have ours set up with Wells, but we had to go through a special department when we set it up.  I wanted to move the account to a local small regional bank of late, but they couldn't figure out how to set it up. 

[iamlindoro]

So would the steps be to create our own 401K? I thought an institution needed to make this. Then how do we put money into this legally?

It's called an Individual 401(k), sometimes also called a "Solo" 401(k).  It's what we're discussing here.  You can start your own through most brokerages such as Vanguard, Fidelity, etc.  Mine is through Vanguard.

https://investor.vanguard.com/what-we-offer/small-business/individual-401k

We had a pretty detailed discussion on them when I set up my own.  Make sure to read through as I learn some things and correct some of my own misunderstandings.

http://forum.mrmoneymustache.com/investor-alley/sole-proprietorship-and-individual-401k

It's something you will want to understand the mechanics of very well before you attempt, but it's really not that complicated at all to set up.  Vanguard will walk you through all the setup and paperwork over the phone, if you want, and all for free.  Cost is $20 per fund offered by the plan per year.  You decide what you want to "offer," since you're offering it to yourself.  Mine currently is set up with a normal Bogleheads-style three fund portfolio.