Author Topic: Solo 401k - $53,000 tax deferred in 2015!  (Read 6732 times)

bmcewan

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Solo 401k - $53,000 tax deferred in 2015!
« on: March 16, 2015, 11:09:18 AM »
Hello Mustachians,

With self-employment being a big factor in FI, I have not seen much discussion of the solo 401k option. A link to the IRS rules: http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans

In a solo 401k, you are playing the role of employer and employee at the same time. Whether you are single or MFJ, you are able to contribute $18,000 plus up to 25% of your AGI, up to a maximum contribution of $53,000 in 2015. If you have an AGI above $140k, this allows you to maximize your contributions.

To take advantage of this, you must have a business with a tax ID. Also, be careful not to hire any employees (you can pay people as independent subcontractors, though). 

Common sense

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #1 on: March 16, 2015, 12:47:12 PM »
This is exactly what I did this year.  You are allowed to have one employee, which in my case is my wife who is my book keeper.  The added benefit is that you can then put away an additional $22,500 into her 401K.  So I paid her $17,500, then matched an additional $5,000.  This total $74,500 in tax deferred 401K contributions for our family.  The best thing about this is that I salary myself at $120,000 thus keeping my payroll taxes low as well.  With a sep ira you have to salary yourself at circa $250,000 to get to the $53,000 mark and have to pay more payroll taxes and have your salary in a higher tax bracket as well.  Solo 401K is hands down the way to go if you are self employed with only one employee max.

forummm

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #2 on: March 16, 2015, 12:51:26 PM »
The rules on the employer match are a little odd. It ends up being a 20% effective employer contribution since you have to deduct some things from your income first. But for those of you who have self-employment income it's a great way to go. I have considered it myself.

I like the idea of being able to pay your spouse as well to maximize the contributions. I had not thought of that.

forummm

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #3 on: March 16, 2015, 01:04:00 PM »
This is exactly what I did this year.  You are allowed to have one employee, which in my case is my wife who is my book keeper.  The added benefit is that you can then put away an additional $22,500 into her 401K.  So I paid her $17,500, then matched an additional $5,000.  This total $74,500 in tax deferred 401K contributions for our family.  The best thing about this is that I salary myself at $120,000 thus keeping my payroll taxes low as well.  With a sep ira you have to salary yourself at circa $250,000 to get to the $53,000 mark and have to pay more payroll taxes and have your salary in a higher tax bracket as well.  Solo 401K is hands down the way to go if you are self employed with only one employee max.

I'm having trouble understanding how this math works out.

Your effective employer contribution is 20% max: http://www.irs.gov/Retirement-Plans/Self-Employed-Individuals-Calculating-Your-Own-Retirement-Plan-Contribution-and-Deduction

So for $137,500 in income that would be a maximum of $27,500 that could be used as an employer contribution between both employees combined. Add that to the $17,500 for each of you, and you have a $62,500 total contribution (not $74,500).

Also, "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)." So you shouldn't be able to pay your wife $17,500 and have total contributions exceeding $17,500.




http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-401k-and-Profit-Sharing-Plan-Contribution-Limits
« Last Edit: March 16, 2015, 01:51:11 PM by forummm »

dandarc

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #4 on: March 16, 2015, 01:05:14 PM »
Hello Mustachians,

With self-employment being a big factor in FI, I have not seen much discussion of the solo 401k option. A link to the IRS rules: http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans

In a solo 401k, you are playing the role of employer and employee at the same time. Whether you are single or MFJ, you are able to contribute $18,000 plus up to 25% of your AGI, up to a maximum contribution of $53,000 in 2015. If you have an AGI above $140k, this allows you to maximize your contributions.

To take advantage of this, you must have a business with a tax ID. Also, be careful not to hire any employees (you can pay people as independent subcontractors, though).
1.  solo401K's are discussed at least weekly on this forum.

2.  The rule for the match is not 25% of your AGI.  If you are incorporated, you can match up to 25% of your W-2 salary from the business.  If you are a sole-proprietor, it is 20% of your schedule C income, less 1/2 of self employment tax.  I personally deposit 18.5% of my gross + 18K.  Then when doing taxes, true-it up with the precise number from Turbo Tax.

MooseOutFront

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #5 on: March 16, 2015, 01:10:06 PM »
This is exactly what I did this year.  You are allowed to have one employee, which in my case is my wife who is my book keeper.  The added benefit is that you can then put away an additional $22,500 into her 401K.  So I paid her $17,500, then matched an additional $5,000.  This total $74,500 in tax deferred 401K contributions for our family.  The best thing about this is that I salary myself at $120,000 thus keeping my payroll taxes low as well.  With a sep ira you have to salary yourself at circa $250,000 to get to the $53,000 mark and have to pay more payroll taxes and have your salary in a higher tax bracket as well.  Solo 401K is hands down the way to go if you are self employed with only one employee max.
Nice.  It seems superior to the SEP IRA in every was except the record keeping aspect which scares some people off.  I'll be starting a solo 401k this year for my self employed wife.  Her income will be low and it looks like we'll be able to put about all of it after FICA in there.

Jesstache

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #6 on: March 16, 2015, 02:05:23 PM »
Just discovered this lovely option for myself this year as well.  I've been self employed a little over a year and I didn't know this was an option for me until the accountant at the company I contract for mentioned it to me.  I will top out somewhere around $18k plus another $14k so $32k but still, waaay more tax advantaged than the SEP IRA I was thinking of going with.

retireatbirth

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #7 on: March 16, 2015, 04:39:26 PM »
Solo 401ks are also a great way to hide your pre-tax IRA money if you need to do backdoor Roth contributions.

dandarc

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #8 on: March 16, 2015, 04:41:12 PM »
Solo 401ks are also a great way to hide your pre-tax IRA money if you need to do backdoor Roth contributions.
Yep.

hodedofome

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #9 on: March 16, 2015, 07:39:09 PM »
Can you hire your spouse as a contractor and pay them and set up a solo 401k? I wonder if a court would accept that if you file jointly.

MooseOutFront

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #10 on: March 17, 2015, 06:48:07 AM »
Can you hire your spouse as a contractor and pay them and set up a solo 401k? I wonder if a court would accept that if you file jointly.
Your spouse can work for you without you losing solo 401k eligibility.

hodedofome

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #11 on: March 17, 2015, 09:39:58 AM »
Interesting. If your spouse already has a job with a 401k (that is not maxed out), can your spouse receive a contract salary from you and contribute to a solo 401k as well?

My wife has a good bit of 1099 income and I help out 'unpaid' at this point. If I got payments from her and set up a solo 401k for myself (on top of hers), then I could lower her income down quite a bit.

terran

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #12 on: March 17, 2015, 09:53:13 AM »
You are allowed to have one employee, which in my case is my wife who is my book keeper.

This isn't exactly true. Solo 401k's are only allowed in single owner businesses where the only other employee is the owner's spouse or in partnerships with no non-owner employees. You're fine since your wife is your only employee though.

The rules on the employer match are a little odd. It ends up being a 20% effective employer contribution since you have to deduct some things from your income first.


This is actually only true for sole proprietorships. In a non-passthrough entity it's still 25%, but the income it's based on is calculated. The reason it's 20% for a sole proprietor is that it's self referential in that the contribution itself reduces income, so you need to reduce the contribution. Proof: $10,000 schedule C income * 0.2 = $2000 allowed contribution. Or ($10,000 income - $2000 contribution "expense") * 0.25 = $2000 allowed contribution. So either way you end up at the same "employer" contribution amount.
« Last Edit: March 17, 2015, 10:01:11 AM by terran »

mtn

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #13 on: March 17, 2015, 10:06:29 AM »
A woman I used to work with quit her job because to "work" for her husband, a Doctor. Apparently when all was said and done, the tax savings were larger than her salary at the megacorp.

So here is a situation. Let's say that I have a full time job with a corporation, and I am an independent contractor on the side. With the side job, I earn about $5k a year. I have always just filed this on my regular taxes under other income, and never incorporated or anything. Would it be possible to make this a business, say that my spouse (who in this situation would be stay at home) is my employee, and pay her basically just a maxed out 401k? Or is that not legal since the expenses would be higher than the revenue and I have a separate full time job?

Financial.Velociraptor

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #14 on: March 17, 2015, 10:14:48 AM »
Setting aside that you are proposing tax fraud...schedule C has to turn a profit 3 out of 5 years in most cases or it gets reclassified as "hobby income".

theoverlook

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #15 on: March 17, 2015, 02:18:13 PM »
You are allowed to have one employee, which in my case is my wife who is my book keeper.

This isn't exactly true. Solo 401k's are only allowed in single owner businesses where the only other employee is the owner's spouse or in partnerships with no non-owner employees. You're fine since your wife is your only employee though.


Are Solo 401k's allowed in C corporations with no non-owner employees but with 3 co-owner employees?

planner10

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #16 on: March 17, 2015, 02:59:37 PM »
What about the ~1M maximum?  I have read a bunch of stuff on this topic and can't figure out if the 1M maximum is per person or per tax return, or per account.  If it includes just contributions, or total value?  What happens if you exceed it?

(Don't mean to hijack the thread - I'm happy to make a separate post, it's more of a sidebar from your topic since if we start contributing 100k/yr as a couple we could easily be in the 1M territory.)

dandarc

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #17 on: March 17, 2015, 03:01:51 PM »
What about the ~1M maximum?  I have read a bunch of stuff on this topic and can't figure out if the 1M maximum is per person or per tax return, or per account.  If it includes just contributions, or total value?  What happens if you exceed it?

(Don't mean to hijack the thread - I'm happy to make a separate post, it's more of a sidebar from your topic since if we start contributing 100k/yr as a couple we could easily be in the 1M territory.)
There is no 1M maximum.

terran

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #18 on: March 18, 2015, 10:27:43 AM »
You are allowed to have one employee, which in my case is my wife who is my book keeper.

This isn't exactly true. Solo 401k's are only allowed in single owner businesses where the only other employee is the owner's spouse or in partnerships with no non-owner employees. You're fine since your wife is your only employee though.


Are Solo 401k's allowed in C corporations with no non-owner employees but with 3 co-owner employees?

I think so, but don't quote me on that. It would be worth doing some research.

DavidAnnArbor

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #19 on: March 18, 2015, 11:39:21 PM »
I thought this previous thread was very information rich regarding the solo 401k

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

DavidAnnArbor

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #20 on: March 18, 2015, 11:41:11 PM »
Also if you email or write a letter to the IRS with questions they will get back to you regarding the solo 401(k) and they are very helpful.

Cathy

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #21 on: March 19, 2015, 12:45:00 AM »
With the side job, I earn about $5k a year. I have always just filed this on my regular taxes under other income...

Pursuant to 26 USC § 6017, if your net earnings from self-employment exceed $400, you are require to make a return of self-employment tax (i.e. file Schedule SE) and pay the self-employment tax (the technical term for social security and medicare taxes imposed on self-employment income). You cannot just opt out of self-employment tax. Your choice to do so was unlawful. If you care about compliance with the law, you need to amend your past returns and pay the tax owing.
« Last Edit: March 19, 2015, 12:47:08 AM by Cathy »

mtn

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Re: Solo 401k - $53,000 tax deferred in 2015!
« Reply #22 on: March 19, 2015, 06:16:03 AM »
With the side job, I earn about $5k a year. I have always just filed this on my regular taxes under other income...

Pursuant to 26 USC § 6017, if your net earnings from self-employment exceed $400, you are require to make a return of self-employment tax (i.e. file Schedule SE) and pay the self-employment tax (the technical term for social security and medicare taxes imposed on self-employment income). You cannot just opt out of self-employment tax. Your choice to do so was unlawful. If you care about compliance with the law, you need to amend your past returns and pay the tax owing.
And then I will refer them to turbo tax and my former accountant to pursue. I've been claiming the income correctly, with a "company" name, and have been paying the taxes on it since I was 15, 10 years ago. I'm legal:). May have used the wrong terminology in the post (and this one) but everything is on the up and up. Past two years I've taken a hit to the return because of it.
« Last Edit: March 19, 2015, 06:19:31 AM by mtn »