Author Topic: Best use of Individual 401k  (Read 1357 times)

Grande

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Best use of Individual 401k
« on: April 28, 2018, 06:03:36 AM »
My wife is self employed (LLC) and for her retirement accounts we use an Individual 401k account at Schwab. I have a question on how to most effectively use this. Let me be specific so I can be clear here. Every other week she transfers money from her work bank account to our personal checking account. That's her paycheck. From there we send some money to her 401k for an employee contribution. My question is if this is the best way to do things.

For example, should she instead send money from her work account directly to Schwab for an employer contibution ? In this case she paying herself less. Does she then pay less income tax (upfront rather than at tax time) and also duck SS and Medicare? She is self employed so she pays both sides of this.

Thoughts? 
« Last Edit: April 28, 2018, 06:05:55 AM by Grande »

mintleaf

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Re: Best use of Individual 401k
« Reply #1 on: April 28, 2018, 03:05:34 PM »
Yes, the Individual 401k lets you make employer contributions in addition to the usual employee contributions. The employer contribution is based on a percentage of self-employment income (the exact percentage depends on the tax status of the LLC). And both contributions are pre-tax, up to a total of $55k in 2018. There are IRS worksheets to calculate exactly how much you can contribute. It's a really sweet deal if you have self employment income.

Grande

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Re: Best use of Individual 401k
« Reply #2 on: April 29, 2018, 05:29:24 AM »
Yes, the Individual 401k lets you make employer contributions in addition to the usual employee contributions. The employer contribution is based on a percentage of self-employment income (the exact percentage depends on the tax status of the LLC). And both contributions are pre-tax, up to a total of $55k in 2018. There are IRS worksheets to calculate exactly how much you can contribute. It's a really sweet deal if you have self employment income.

Thanks. This stuff I'm aware of. My question is do I duck the payroll tax if the invested money is invested thru an employer contribution (and she does not pay herself that $) will payroll tax be avoided. And also we she avoid federal income tax because she that money was never paid to her.

mintleaf

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Re: Best use of Individual 401k
« Reply #3 on: April 29, 2018, 07:26:37 AM »
I've gotten conflicting advice on that. It might depend on the tax status that your LLC has elected. It's probably worth talking to a tax accountant about, since the rules as written are not entirely clear.

Grande

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Re: Best use of Individual 401k
« Reply #4 on: April 29, 2018, 08:50:17 AM »
I've gotten conflicting advice on that. It might depend on the tax status that your LLC has elected. It's probably worth talking to a tax accountant about, since the rules as written are not entirely clear.

Thanks. You got conflicting advice on both issues?

bacchi

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Re: Best use of Individual 401k
« Reply #5 on: April 30, 2018, 03:46:07 PM »
You can't avoid the SE tax for a pass-through entity.

If the LLC has elected C-corp status, then employER contributions can avoid the payroll tax.

Wile E. Coyote

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Re: Best use of Individual 401k
« Reply #6 on: April 30, 2018, 06:02:14 PM »
My wife is self employed (LLC) and for her retirement accounts we use an Individual 401k account at Schwab. I have a question on how to most effectively use this. Let me be specific so I can be clear here. Every other week she transfers money from her work bank account to our personal checking account. That's her paycheck. From there we send some money to her 401k for an employee contribution. My question is if this is the best way to do things.

For example, should she instead send money from her work account directly to Schwab for an employer contibution ? In this case she paying herself less. Does she then pay less income tax (upfront rather than at tax time) and also duck SS and Medicare? She is self employed so she pays both sides of this.

Thoughts?

Has she made any elections with respect to how her LLC will be taxed?  If not, the LLC will be disregarded and there will be no "employer" to make contributions.  If she had elected to be taxed as an S corporation, then employer contributions are not subject to SE tax, but she will still need to pay herself reasonable compensation which will be subject to self employment tax.  She will also need to consider the impact of the Section 199A pass-through deduction in deciding how best to structure her business from a tax perspective.