Author Topic: Solo Roth 401ks and After Tax 401k Contributions  (Read 4037 times)

bradfol8

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Solo Roth 401ks and After Tax 401k Contributions
« on: April 20, 2015, 09:59:14 AM »
According to the Mad FIentist, the limit that you can contribute to your 401k is not truly $18k. You've got that much you can contribute in pretax dollars, then your employer can contribute up to 50% of your salary (obviously nowhere close to this for most of us.) This is pretax as well. But then you can contribute additional money in after tax contributions. You can contribute a total of $52k - $18k - employers contributions. You may ask why you would do this, put after tax dollars into a 401k. The answer is this is just a pitstop for your money. You then roll the after tax dollars out to a Roth IRA. This doesnt count to your $5500 annual cont limit, so its a way to contribute a lot more to your Roth.

The problem is your plan has to allow after tax contributions and mine doesn't. So instead I'm interested in creating a Solo Roth 401k that is self directed. I was to buy property with a self-directed 401k/IRA so that any income it brings in is tax free. Problem is I dont own a business so I dont know how I would create a Solo 401k/IRA.

Does anyone have any ideas here? I really think using a self-directed Roth IRA or 401k is a potential golden goose. I'm interesting in both flipping houses (no capital gains taxes) and acquiring rental property (no tax on rental income.)

bacchi

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #1 on: April 20, 2015, 04:48:18 PM »
You're going to have to generate some self employed income in order to use a solo 401k. No way about it.

How would you avoid paying capital gains taxes on house flipping? Buy, restore, live in it for 2 years, sell, and repeat?


forummm

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #2 on: April 20, 2015, 05:08:05 PM »
And in addition to having to earn a lot of self-employment income, you have to pay 15.3% FICA tax (up to the SS limit and then that drops the employee side of SS) on that income in addition to your regular taxes. And you can only contribute up to 20% of your self-employment income beyond your annual $18k to all 401k plans. So you have to make a lot of money to get to the full $53k.

bradfol8

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #3 on: April 20, 2015, 05:19:00 PM »
Any assets owned by a Roth earn only tax free income. So if your Roth owns a house and it appreciates or you improve it and sell it, these gains are protected and stay in the Roth.

So you're saying that if I make $100k, I contribute $18k pretax, my employee contributes $10k, that I could only contribute $20k in after tax contributions, not the full $24k? Didn't know that. Still that's a lot more than just $18k!

bacchi

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #4 on: April 20, 2015, 06:31:21 PM »
Any assets owned by a Roth earn only tax free income. So if your Roth owns a house and it appreciates or you improve it and sell it, these gains are protected and stay in the Roth.

Ah, of course.

Quote
So you're saying that if I make $100k, I contribute $18k pretax, my employee contributes $10k, that I could only contribute $20k in after tax contributions, not the full $24k? Didn't know that. Still that's a lot more than just $18k!

That doesn't sound like self employed income unless you're also the "employer."

forummm

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #5 on: April 21, 2015, 01:15:35 PM »
So you're saying that if I make $100k, I contribute $18k pretax, my employee contributes $10k, that I could only contribute $20k in after tax contributions, not the full $24k? Didn't know that. Still that's a lot more than just $18k!

Sounds wrong. I think it's 20% of your self-employment income after you take the deduction for 1/2 of self employment taxes for unincorporated businesses. So a bit less than $20k. But it has to be your self-employment income. I'm not sure where your employee contributes money to your plan.

Hot_AZ

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #6 on: April 21, 2015, 01:47:59 PM »
Wait?  What?  Newbie LIGHTBULB may have just gone off ...  so i have a full time job where i contribute my $18K, i max out my Roth at $5500 and I also have a small photography business. 

Are you saying I can contribute based on that income to a 401k as well?  Can someone help me with that math?   Say I make $20k but i have $10k in costs.  Can I put in 20% of the $10,000? 

dandarc

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #7 on: April 21, 2015, 01:52:08 PM »
Wait?  What?  Newbie LIGHTBULB may have just gone off ...  so i have a full time job where i contribute my $18K, i max out my Roth at $5500 and I also have a small photography business. 

Are you saying I can contribute based on that income to a 401k as well?  Can someone help me with that math?   Say I make $20k but i have $10k in costs.  Can I put in 20% of the $10,000?
More like 18.5% of the 10K unless you are incorporated, but yes.  However, a SEP-IRA might be better in your specific situation because you're already using your 18K employee deferral at your day job, so the soloK has no advantage over the SEP-IRA, and the SEP is a bit simpler to deal with on the paperwork front.

Hot_AZ

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #8 on: April 21, 2015, 03:08:38 PM »
dandarc, thank you so much!!!!  I had no idea and neither our financial planner nor our accountant ever suggested that.  Thank you, thank you, thank you!  I'm off to do more research. 

simplified

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #9 on: April 21, 2015, 05:10:15 PM »
None of the Solo 401k plans offered by big companies like Vanguard, Fidelity or TDAmeritrade allow you to invest in real estate or any other unconventional stuff other than stocks, mutual funds and etfs. Neither do they allow you to do in-plan roth conversions.

Unless you are going to invest a few hundred thousand dollars and prepare to do a whole bunch of paperwork and pay a whole bunch of money to the plan administrators, I would stay away from this idea.

On the other hand, I like Solo 401k because it lets you defer up to 55k or so of income, thereby reducing your tax liability now, assuming you are in a high tax bracket.

forummm

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #10 on: April 21, 2015, 06:16:13 PM »
Does anyone have any ideas here? I really think using a self-directed Roth IRA or 401k is a potential golden goose. I'm interesting in both flipping houses (no capital gains taxes) and acquiring rental property (no tax on rental income.)

There are a lot of tax breaks for owning rental properties anyway. You can put other assets in your tax advantaged savings accounts.

Hot_AZ

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #11 on: April 22, 2015, 08:50:40 AM »
So another newbie question, I'm inheriting some money this year from my parents estate.  It sounds like it's going to be considered as income and not taxed at the 40% (still going thru the paperwork, this is the initial word from the "experts"). 

If that is considered as "taxable income", can it be deferred to a SEP in addition to my small business income? 

Druid

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #12 on: April 22, 2015, 10:09:41 AM »
So another newbie question, I'm inheriting some money this year from my parents estate.  It sounds like it's going to be considered as income and not taxed at the 40% (still going thru the paperwork, this is the initial word from the "experts"). 

If that is considered as "taxable income", can it be deferred to a SEP in addition to my small business income? 


Inheritances are not taxed unless they exceed $5,430,000 by the federal government. That is $5,430,000 per estate not per person. If you and any other beneficiaries are inheriting more than that then I would hire either a tax accountant or lawyer that specialized in estate taxes. Now if your parents did not have a proper will or trust you may pay money to the probate court. Also you may need to pay state taxes on what you inherit and this can vary greatly from state to state. Some states will have their own exemption amounts.

Hot_AZ

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #13 on: April 22, 2015, 10:31:41 AM »
Sorry, should have clarified, inheriting some from a 403b and some from an annuity.  I am splitting 505 with my brother (only other beneficiary).  The amount does not exceed the federal limit.  The trust was not setup well and both accounts were paid to the trust/estate instead of directly to my brother and I so we have to cash them out resulting in taxes. 

Drifterrider

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #14 on: April 22, 2015, 12:08:17 PM »


There are a lot of tax breaks for owning rental properties anyway. You can put other assets in your tax advantaged savings accounts.
[/quote]

Point me in the right direction.  I have a rental and don't need the money now.  No mortgage.  What type of "tax advantaged" do I want to look at insofar as holding the house and having the money be tax deferred for now.

I've read a little about holding real estate in such accounts but haven't paid much attention before now (just got my first rental house).

Thanks.

forummm

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Re: Solo Roth 401ks and After Tax 401k Contributions
« Reply #15 on: April 22, 2015, 02:50:18 PM »


There are a lot of tax breaks for owning rental properties anyway. You can put other assets in your tax advantaged savings accounts.

Point me in the right direction.  I have a rental and don't need the money now.  No mortgage.  What type of "tax advantaged" do I want to look at insofar as holding the house and having the money be tax deferred for now.

I've read a little about holding real estate in such accounts but haven't paid much attention before now (just got my first rental house).

Thanks.
[/quote]

You can find a lot of stuff on this in the landlord section of the forum. All your expenses and depreciation can add up.