I have a 457 (b) Can I use salary funds to max out a 401(k) solo

[EngiNerd]

I work at a state agency and max out my 457 (b), my ira, and my hsa every year and have a few thousand left for after tax investments.  I know some government agencies offer a 457(b) and 401(k) so people can put 36,000 away pre-tax.  Mine does not, and I was always under the impression that in order to take advantage of separate contribution limits of the 401(k) and 457(b) I would need to start a business and then the money earned by that business could be contributed to a solo 401 (k) and therefore avoid taxes on it.  I have a coworker that claims the tax code simply states if you have earned income in the business you can contribute to the solo 401 k, even using my salary from the government work.  Like say I make 100k from my government job and $10 from my business can I deduct 18000 from my salary by funding the 401 (k) solo even though that is way more money than my business earned?  I suspect not but I could not find a definitive answer by googleing or scanning irs.gov.  I figured plenty of people on this forum know the answer off the top of their head and where to locate it so thanks for helping me out!

[dandarc]

That is very much not correct.  You cannot defer more than you made in a solo K.

The worksheet here shows the full computation if you are organized as a proprietor.  https://www.irs.gov/publications/p560/ch05.html

You might be able to get away with this for a year or two if you incorporate and pay yourself a salary, but that's a lot of trouble to go through to arguably commit tax fraud, and your unprofitable business will likely be reclassified as a hobby at some point.

Not that you shouldn't start a side business and contribute to a soloK - but you probably want to be making more than $10 / year to make it worth your while.

[dandarc]

https://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans

also spells out the rules fairly well, I think.  Key part is deferral is capped at 100% of compensation.

[EngiNerd]

https://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans

also spells out the rules fairly well, I think.  Key part is deferral is capped at 100% of compensation.

Right I saw that one.  And I am 99.9% certain you are right.  My coworker claims that because it does not say %100 of compensation from the S-corp... It simply means you must have income to account for the contribution.   I would never try to start a fake business to try and exploit a tax loop hole, not really a loop hole probably, I just wanted to find an answer that would convince him because we debated it for like 20 minutes.  And I just haven't been able to convince him, although I think he just dug in to his original argument and is being unwilling to let evidence change his mind. 

[EngiNerd]

Could earned income technically mean from your salary?  Could compensation include your salary?

[JZinCO]

https://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans

also spells out the rules fairly well, I think.  Key part is deferral is capped at 100% of compensation.

Right I saw that one.  And I am 99.9% certain you are right.  My coworker claims that because it does not say %100 of compensation from the S-corp... It simply means you must have income to account for the contribution.   I would never try to start a fake business to try and exploit a tax loop hole, not really a loop hole probably, I just wanted to find an answer that would convince him because we debated it for like 20 minutes.  And I just haven't been able to convince him, although I think he just dug in to his original argument and is being unwilling to let evidence change his mind.

IRS already taxes FICA from the w2; if someone claims to be earning side business money then they get to tax that money AGAIN for employer and employee's share of FICA. Effectively for every dollar of income your CW proposes double-counting, they get to double their FICA taxes. Yayyy.

[maizefolk]

I've been in a surprisingly similar situation. You don't have to specifically use the business income, but your contribution is capped based on the income you earn from the business. You could earn $1,000 from the side business, spend that on a nice-ish laptop, and contribute up to $1,000 of your day job salary to the solo 401k (so it is really a distinction without a practical difference).

[EngiNerd]

I've been in a surprisingly similar situation. You don't have to specifically use the business income, but your contribution is capped based on the income you earn from the business. You could earn $1,000 from the side business, spend that on a nice-ish laptop, and contribute up to $1,000 of your day job salary to the solo 401k (so it is really a distinction without a practical difference).

That's how I read it too.  I just haven't seen it explicity written out that the max contribution from for a 401(k) solo is capped at the business income (minus some taxes i think) for which you opened the 401(k).  I think it is written clear enough for most but not all apparently.

https://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans

also spells out the rules fairly well, I think.  Key part is deferral is capped at 100% of compensation.

Right I saw that one.  And I am 99.9% certain you are right.  My coworker claims that because it does not say %100 of compensation from the S-corp... It simply means you must have income to account for the contribution.   I would never try to start a fake business to try and exploit a tax loop hole, not really a loop hole probably, I just wanted to find an answer that would convince him because we debated it for like 20 minutes.  And I just haven't been able to convince him, although I think he just dug in to his original argument and is being unwilling to let evidence change his mind.

IRS already taxes FICA from the w2; if someone claims to be earning side business money then they get to tax that money AGAIN for employer and employee's share of FICA. Effectively for every dollar of income your CW proposes double-counting, they get to double their FICA taxes. Yayyy.

 

Does that mean you would just show a portion of your salary twice? The original thought was that say you have that 100k salary plus 10$ from the business you would be taxed off of 100,010 minus tax and deductions (including 18k to the 457 and 18k to the 401k)

[EngiNerd]

"Net income
For sole proprietors, this is your net income from your tax Schedule C or C-EZ. For single owner corporations with no employees other than yourself or your spouse, this is your w-2 wages."

Read more: http://www.bankrate.com/calculators/retirement/self-employed-401-k-calculator.aspx#ixzz3zutzyaoB



W-2 wages...  That makes me think government salary could be part of your income....

[JZinCO]

"Net income
For sole proprietors, this is your net income from your tax Schedule C or C-EZ. For single owner corporations with no employees other than yourself or your spouse, this is your w-2 wages."

Read more: http://www.bankrate.com/calculators/retirement/self-employed-401-k-calculator.aspx#ixzz3zutzyaoB



W-2 wages...  That makes me think government salary could be part of your income....

No, it would be S-corp w2 income (see bold)

[JZinCO]

IRS already taxes FICA from the w2; if someone claims to be earning side business money then they get to tax that money AGAIN for employer and employee's share of FICA. Effectively for every dollar of income your CW proposes double-counting, they get to double their FICA taxes. Yayyy.

 

Does that mean you would just show a portion of your salary twice? The original thought was that say you have that 100k salary plus 10$ from the business you would be taxed off of 100,010 minus tax and deductions (including 18k to the 457 and 18k to the 401k)

No, becasue when you fill out taxes you have 100,000 listed on your w2. In order to make a contribution you need to show earnings on schedule C. Thus you need to put 18K (plus enough to cover SE taxes) on your schedule C as earnings. You are telling the IRS you made 118K+. SE is skimmed off the top and no solo 401k can reduce SE taxes.
Since you effectively cannot remove that 18K from your w2 (the amount fradulently claimed on Schedule C) you still pay income tax on that.
So, sure you can make a fake business, not make 18K and say you do. You still pay 1/2 SE tax on your w2 and then you pay 1x SE tax AGAIN from schedule C. It's a losers game. If this was a realistic and legal scenario don't you think it would advertised to every american without a workplace 401k?