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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Chupi555 on November 17, 2014, 02:28:04 AM

Title: newbie 401k tax question
Post by: Chupi555 on November 17, 2014, 02:28:04 AM
I'm very new to this stuff and just want to make sure I have this logic correct.

If I am self-employed and make $60,000 this year, according to this calculator (, I would be able to put $28,653 into a Self-Employment 401(k) plan.

Assuming I put $28,653 into that 401(k), does this mean that I would only pay income tax on $31,347?

This seems too good to be true!

The calculator doesn't show Roth IRA anywhere, can I still put some into a Roth some how and how would that affect these numbers?

Title: Re: newbie 401k tax question
Post by: Cromacster on November 17, 2014, 06:12:08 AM
I can't speak much to the actual numbers, but if you are able to defer 28,653, yes you would only pay taxes on 31,347.  Though I am not too familiar with how the self employment rules work.

contributing to a Roth IRA will not affect those numbers.  A Roth is funded with post tax dollars.
Title: Re: newbie 401k tax question
Post by: nereo on November 17, 2014, 08:37:34 AM
As Cromacster said, whatever you put into your 401(k) you will not be taxed on this year.  You will be taxed on it when you withdraw (but there are ways of opimizing this, like a ROTH ladder conversion).

Any money you put into a ROTH is taxed.  That is why you cannot find a calculator.

Yes, it is amazing that you can earn $60k in this country, save~$28k, and only be taxed on ~$23k after your standard deductions.  Your effective tax rate will be about 5% (federal).  Think about this the next time someone bemoans how high taxes are - there's always a legal way in the US to pay very little in taxes if you save smart.
Title: Re: newbie 401k tax question
Post by: sol on November 17, 2014, 08:57:58 AM
Your solo 401k has the same $18k contribution limit for 2015 that all 401k plans have, assuming you're under 50 years old.

But because you're self employed you also get access to a SEP IRA, which is also tax deductible, with a contribution limit that is 25% of your gross income (capped at $51k, just in case you're self employed and rich as hell).

So if you make 60k, you should be able to contribute 18k to your 401k and another 15k to your SEP IRA, for a total of $33k.

This would reduce your taxable income down to 27k, which is below the taxable income limit for many families.  If you were a married person with two kids, for example, you'd have zero taxable income after deductions and exemptions.

Title: Re: newbie 401k tax question
Post by: Cheddar Stacker on November 17, 2014, 09:35:52 AM
Agree with Knaak, solo 401k should allow for deferring nearly half of $60K by itself.

Also for clarity: This will reduce federal income taxes, and likely state income taxes. This will not reduce self employment (FICA/SE) taxes. So you will have to pay $60,000*14%(ish) no matter how much you defer if that $60K is net of expenses.
Title: Re: newbie 401k tax question
Post by: sol on November 17, 2014, 09:37:03 AM
A solo 401k allows you to contribute as both the employee and the employer.  Why would you set up a separate SEP IRA if you already have a solo 401k?

Good point, the solo 401k allows additional contributions very similar to what the SEP IRA offers.

I'm not sure why anyone would use both, unless it allowed higher total contributions.
Title: Re: newbie 401k tax question
Post by: simplified on November 17, 2014, 11:40:21 PM
You can defer up to 17.5k of your w2 wages. Your employer (yourself in this case) can contribute 25% of your wages to your 401k. So if you paid yourself 40k, the employer can contribute 10k. You need to play with the numbers and make sure there is enough left to pay the self employment payroll taxes, so that the total equals 60k.