Author Topic: Solo 401k with Spouse  (Read 2678 times)

Mr H

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Solo 401k with Spouse
« on: August 06, 2015, 11:46:24 AM »
I can't seem to find the answers/calculations anywhere so I figured this is the best place to ask my questions.

My wife is a resident physician and we are using Pay As You Earn Loan repayment.  We file taxes jointly because we're in a community property state.  10% of our discretionary income (Our AGI - 150% of Federal Poverty Level for our family size) is repaid on the loan each year, using the previous year's AGI for calculation.  She has a 457 deferred comp plan offered through her employer, I have 401k and HSA offered through mine.  I plan on maxing these accounts next year across the board.

After 10 years of these 10% of Discretionary Income payments, the remaining loan balance will be forgiven.  If we keep our AGI under 150% of the federal poverty level for a family of 2, we will have $0.00 "payments" but they will still count towards the 120 total required "qualifying payments" before loan forgiveness. 

My expected annual income next year is 70k and hers is 48k. 

What if:  If I am able to convince my employer to bring me on as an independent contractor, could I open up a solo 401k and "hire" my wife part time to help me run my business?  She would continue to have her current employer with the 457 and I could hopefully squirrel away additional savings through the solo 401k for me and any additional contributions we could make for her since she currently does not have 401k available.  Is this even possible? 

I think it would benefit my employer to have me as independent because they wouldn't have to pay for my benefits package, and I could use the increased tax shelter flexibility.  What costs am I overlooking that are associated with being an independent contractor?  I think I could be covered under her healthcare relatively cheaply compared to open market. 

How is the profit sharing contribution treated for the business?  If I made 50k salary, contributed my max 18,000 could the business contribute the rest up to 53k?  What if I made 80k?  Can I also contribute for my wife if she helps me run the business part time and how do I go about this legally?

We live relatively frugally and I think we could afford to contribute quite a bit more each year for tax and loan purposes.

forummm

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Re: Solo 401k with Spouse
« Reply #1 on: August 06, 2015, 02:28:33 PM »
She doesn't have a 403b available? I haven't seen 457's without a 403b before.

dandarc

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Re: Solo 401k with Spouse
« Reply #2 on: August 06, 2015, 02:40:53 PM »
She doesn't have a 403b available? I haven't seen 457's without a 403b before.
You haven't worked for the state of Florida then.  401(a) with mandatory 3% and no option for additional or lower deferral, and then a standard 457b.  Still something for OP to ask about though.

OP - remember she will be an employee, so anything you pay her will be subject to self-employment tax at 15.3%.  It might not technically be called self-employment tax, but you're paying both halves is the point.  So you're kind of cutting your nose off to spite your face in a way - paying 15.3% in additional taxes to save 10% in loan payments.  Granted, you do get some of that back in the form of higher social security benefits down the road.

But, so long as she really is helping you run the business, you could go this route.

The details on solo K depend on how you are organized.  If you are incorporated (often some variation of an S-Corp), you can defer 18K + 25% of your W-2 wages.  If you are a sole-proprietor, you can contribute 18K + 20% of your schedule C net income less 1/2 of self employment tax.  Either way, your wife is your employee and so the 18K + 25% of her W-2 wages applies.
« Last Edit: August 06, 2015, 02:42:50 PM by dandarc »

Mr H

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Re: Solo 401k with Spouse
« Reply #3 on: August 06, 2015, 02:47:28 PM »
No 403b available or 401k.  Only 457.  I have 401k but neither of the others.  Ideally I would like to end up with AGI around 23k annual + or - 5k depending on how well we can stick to the budget.  With the 70k in salary I'll make and her 48k, our current best case scenario gives me:

118k gross
-18k 401k
-18k 457
-4k health ins/dental/vision
-3350 (My HSA)
-11,000 Traditional IRA

=  63.7k

Just brainstorming other methods to reduce that AGI.

Mr H

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Re: Solo 401k with Spouse
« Reply #4 on: August 06, 2015, 02:53:06 PM »
She doesn't have a 403b available? I haven't seen 457's without a 403b before.
You haven't worked for the state of Florida then.  401(a) with mandatory 3% and no option for additional or lower deferral, and then a standard 457b.  Still something for OP to ask about though.

OP - remember she will be an employee, so anything you pay her will be subject to self-employment tax at 15.3%.  It might not technically be called self-employment tax, but you're paying both halves is the point.  So you're kind of cutting your nose off to spite your face in a way - paying 15.3% in additional taxes to save 10% in loan payments.  Granted, you do get some of that back in the form of higher social security benefits down the road.

But, so long as she really is helping you run the business, you could go this route.

The details on solo K depend on how you are organized.  If you are incorporated (often some variation of an S-Corp), you can defer 18K + 25% of your W-2 wages.  If you are a sole-proprietor, you can contribute 18K + 20% of your schedule C net income less 1/2 of self employment tax.  Either way, your wife is your employee and so the 18K + 25% of her W-2 wages applies.

So hypothetically if I make 80k and give her an 18k salary to manage my filing and uniforms each year I(we) would pay 15.3% self employment tax on the 80k?  So even if we deferred the entire salary into 401k we aren't coming out ahead?  In my mind if I continue my current route I will have income taxed in both the 10% and 15% brackets, plus the 10% from the loan savings. 

I really appreciate your response and apologize for being a novice.  I've only recently started to really dig into my personal finance and planning for retirement but I'm glad I decided to do so at 25.

dandarc

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Re: Solo 401k with Spouse
« Reply #5 on: August 06, 2015, 03:25:58 PM »
She doesn't have a 403b available? I haven't seen 457's without a 403b before.
You haven't worked for the state of Florida then.  401(a) with mandatory 3% and no option for additional or lower deferral, and then a standard 457b.  Still something for OP to ask about though.

OP - remember she will be an employee, so anything you pay her will be subject to self-employment tax at 15.3%.  It might not technically be called self-employment tax, but you're paying both halves is the point.  So you're kind of cutting your nose off to spite your face in a way - paying 15.3% in additional taxes to save 10% in loan payments.  Granted, you do get some of that back in the form of higher social security benefits down the road.

But, so long as she really is helping you run the business, you could go this route.

The details on solo K depend on how you are organized.  If you are incorporated (often some variation of an S-Corp), you can defer 18K + 25% of your W-2 wages.  If you are a sole-proprietor, you can contribute 18K + 20% of your schedule C net income less 1/2 of self employment tax.  Either way, your wife is your employee and so the 18K + 25% of her W-2 wages applies.

So hypothetically if I make 80k and give her an 18k salary to manage my filing and uniforms each year I(we) would pay 15.3% self employment tax on the 80k?  So even if we deferred the entire salary into 401k we aren't coming out ahead?  In my mind if I continue my current route I will have income taxed in both the 10% and 15% brackets, plus the 10% from the loan savings. 

I really appreciate your response and apologize for being a novice.  I've only recently started to really dig into my personal finance and planning for retirement but I'm glad I decided to do so at 25.
Well, may have overstated for effect.  But basically, if you have 80K of self-employment income, you're gonna pay 15.3% in self-employment tax on that, regardless of how you divvy it up.  Technically 15.3% of 92.35% of that.  Whereas if you stand pat, you're paying 7.65% - only the employee half of FICA.

So the equation is more like 15% saved on income tax + 10% student loan payments - 7.65% employer half of FICA that you are paying now - whatever student loan interest would have been deductible - any matching your 401K might give you.  Might be around 15% total savings available going this route.  That's on the roughly 34K (another 18K bucket for here + about 20% of the whole 80K) in additional deferral you'd pick up.

Honestly, if I were considering this, I'd want more money as an independent contractor than 10K over salary.  When I made the jump, I went from 90K to ~120K myself, which might not have been enough.  Which of course goes counter to the whole reducing student loan payments, but would leave you with more money at the end of the day.  Going 1099 is risky business - you need to be compensated for that risk.

forummm

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Re: Solo 401k with Spouse
« Reply #6 on: August 06, 2015, 04:20:20 PM »
No 403b available or 401k.  Only 457.  I have 401k but neither of the others.  Ideally I would like to end up with AGI around 23k annual + or - 5k depending on how well we can stick to the budget.  With the 70k in salary I'll make and her 48k, our current best case scenario gives me:

118k gross
-18k 401k
-18k 457
-4k health ins/dental/vision
-3350 (My HSA)
-11,000 Traditional IRA

=  63.7k

Just brainstorming other methods to reduce that AGI.

Why the $23k target? This $63k scenario looks great to me. At some point you don't get as much benefit from the deductions as the taxes will cost you when you pull the money out in retirement. Generally once you get into the 10% or 15% bracket, you probably don't need more 401k-style deductions, but YMMV.

Mr H

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Re: Solo 401k with Spouse
« Reply #7 on: August 07, 2015, 09:52:56 AM »
The 23k target is the federal poverty level for a family of two, multiplied by 1.5.  Its the deciding factor on loan repayment amounts each year.

I understand the diminishing return but I'm more or less trying to challenge myself to get to that number. 

I'm thinking our 457 will be at $18,000 x 4 = $72,000 after the 4 year residency.  We know that she will be changing employers at that time and my understanding is we could access the money at that point if need be (say they govt votes against the public service loan forgiveness program)

As it sits my 401k would be around $72,000 at that point as well and lets assume about 14k in HSA.

If I were able to get closer to 53k for myself each year and the maybe 18k in the wife's name through the solo plan, we could still contribute to the 457.  53+18+18 would mean I'd have a large portion of my 401k savings taken care of by the time I turned 30.  I would then hopefully concentrate on paying a house off asap wherever we decide to plant our roots, and prepare for parenthood.  If I understand correctly we could borrow 50k from each of our 401ks to put towards a home, and take the 10k first time homebuyer withdrawal from the IRAs. 

Maybe I'm out-thinking myself at this point and should focus on Roth and taxable stocks while we're in this lower tax bracket.  I just figure tax bracket + 10%(loans) which are deferred to the next year.  In other words if I'm in the 15% bracket this year, I will have to pay the 10% next year in the form of monthly payments when I might be at 28% tax. 

The "dream" for us would be to take a couple of months off before she becomes an attending physician to do some traveling/move, since this would allow us to have 1/2 year on resident's salary and 1/3 year on physician salary for her and 10/12 salary for me that year.  The next year we will see a large spike in income with her status and I expect at that point to be paying full price on the loans moving forward. 

jezebel

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Re: Solo 401k with Spouse
« Reply #8 on: August 07, 2015, 10:42:08 AM »
I am in a similar boat and have been trying to brain storm ways to open a solo 401K for myself since I have no retirement plan offered through my job.  We have plans to purchases a rental property at some point so I was thinking of creating an LLC for the purpose of getting a solo 401K.  My husband may have access to a 403b and 457, but we need to explore that more.

forummm

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Re: Solo 401k with Spouse
« Reply #9 on: August 07, 2015, 10:45:43 AM »
Quote
The 23k target is the federal poverty level for a family of two, multiplied by 1.5.  Its the deciding factor on loan repayment amounts each year.

...

The next year we will see a large spike in income with her status and I expect at that point to be paying full price on the loans moving forward. 

OK, I see what you are trying to do. However, by having $0 payments for a couple years now, you are probably not eliminating the amount you have to pay over the long run. You will just have to pay more interest over the long run. If your income is going to be high enough, you'll just be paying extra in the years your income is high. The PSLF requires you to work the full 10 years in qualifying employment to have the balance of your loans forgiven. But it also requires the income to be low relative to the loan repayments. So if you're making $223k (to make the math easy), that still leaves $20k/year in room for loan payments. You didn't specify how much debt she has, but if she did 2 years with paying $0 (through some tricks that will cost you in SE taxes), she'd still have 8 years where she could be paying $20k/year. And all 10 of those years would have to be working for a qualified non-profit or government institution.

Unless there's something else missing here, I suggest just paying the loans of normally. You'll have plenty of income to do that with.

Mr H

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Re: Solo 401k with Spouse
« Reply #10 on: August 10, 2015, 02:54:59 PM »
The cap (max) for a single year of PAYE (Pay As You Earn) can never exceed the amount that would be required had the loan been repaid using the Standard Repayment plan for the 10 year loan.  If we have 190k in outstanding liability at the time we enroll then our worst case scenario on a high earnings year puts us back to the straight payment of ~2200 (double check me there this is off the top of my head) each month.

We'd have to show AGI of about $287,000 in order to have the PAYE amount be maxed out. (287,000 - 23,000) = 264,000 * .10 = 26400 annual.

We expect her earnings to be around $160k - $180k annual upon completion of residency and mine to be around 80k. 

Her first year will be $0.00 because it is based on her previous annual when she was a student with no income.
This year we are striving to get to $0.00 and think we've done it. 
We will have 3 more years through residency where we think we could get to 0 (if I am able to do solo 401) or close enough to be significant.
This is five years of close to 0 repayment.

When she starts work as a physician we predict combined income near 250k so at worst we still haven't hit the standard repayment max amount.  At this point we've also basically gotten 5 years forgiven.  She is and will be working for a qualified institution through the remainder of the residency then would only have 6 years left to work in this system before forgiveness. 

Suppose we are able to get our AGI down around $180k annual, we'd pay 18k for 5 years = 90k total applied to this loan.

It just makes it seem like investing aggressively in tax sheltered accounts (401k, 457, H.S.A, IRA) over those ten years will pretty much have our retirement savings taken care of before we're 40, then it can compound while we work on our taxable investments.






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Re: Solo 401k with Spouse
« Reply #11 on: August 17, 2015, 06:38:18 AM »
With an income of $70k, you'd only be able to put away $35.5k into a solo 401k (see Self Employment Retirement Account Calculator).

You could put away ~$49k if you split the income between yourself and your wife.  That is, $18k to wife (all into 401k) and $52k to you ($31k into 401k).

Mr H

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Re: Solo 401k with Spouse
« Reply #12 on: August 19, 2015, 11:46:15 AM »
Thank you all for the responses.  I think I will probably decide to stay on as a full time employee.  The risk vs reward doesn't make it worthwhile to me at this point.

Thanks again all!