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W2 worker, solo 401k question

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  • W2 worker, solo 401k question

    I am a w2 employee and have max employee contributions + employer match of about 36k.  I also have some 1099 income and was wondering if there was a way to max the employer contribution by opening a solo 401k and contributing separately?

  • #2
    yes. you are describing why people open a solo 401k.

    Comment


    • #3
      A couple of additional points.

      1. As a self-employed individual your maximum employer contributions would be 20% of your self-employed earned income (business profit - 1/2 SE tax). Your W-2 income can not be the basis for any self-employed employer contributions.

      2. The employee + employer contribution annual addition limit (2019 = $56K) is for each unaffiliated employer. If your primary W-2 employee plan is a 403b it is considered an affiliated employer and the annual additions must be aggregated with an employer plan of any business you have > 50% ownership. In other words, your maximum self-employed employer contributions would be $56K - 403b employee elective contributions - 403b employer contributions.

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      • #4
        Thanks, it’s an employer sponsored 401k that gets me to about 36k.  I would probably open a solo 401k through Fidelity.  My 1099 income is small but the solo 401k can be used to rollover funds if I leave my employer so I could continue to do back door Roth’s if nothing else.

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        • #5


          the solo 401k can be used to rollover funds if I leave my employer so I could continue to do back door Roth’s if nothing else.
          Click to expand...


          Using Fidelity for your Solo 401(k) will work. They do accept rollover of qualified money into the Solo 401(k). Not all custodians will do so.

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          • #6




            Thanks, it’s an employer sponsored 401k that gets me to about 36k.  I would probably open a solo 401k through Fidelity.  My 1099 income is small but the solo 401k can be used to rollover funds if I leave my employer so I could continue to do back door Roth’s if nothing else.
            Click to expand...


            You may want to also consider setting up a non prototype solo 401k if you have sufficient  1099 income.  Basically you can create a solo 401k plan that in addition to sheltering pre tax income (as spirit rider has shown you above), you can also contribute after tax non roth money to the plan and roll it over to a roth 401k (Megabackdoor roth).  I am in the process of doing this and have tried to organize and document it on this thread

            https://www.whitecoatinvestor.com/forums/topic/research-into-solo-401k-with-intent-for-mega-backdoor-roth/

            There is added cost ($550 to set up and $100 per year to maintain), but if you make a decent amount of 1099 income it can be well worth it to get more tax privileged space.

            It also may give you incentive to get more 1099 income, let me know what you think.  The finance buff (link in the thread) does a great job and has a calculator to help see if it will make sense for you

             

             

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            • #7




              A couple of additional points.

              1. As a self-employed individual your maximum employer contributions would be 20% of your self-employed earned income (business profit – 1/2 SE tax). Your W-2 income can not be the basis for any self-employed employer contributions.

              2. The employee + employer contribution annual addition limit (2019 = $56K) is for each unaffiliated employer. If your primary W-2 employee plan is a 403b it is considered an affiliated employer and the annual additions must be aggregated with an employer plan of any business you have > 50% ownership. In other words, your maximum self-employed employer contributions would be $56K – 403b employee elective contributions – 403b employer contributions.


              Click to expand...


              I would be a sole proprietor without any registered business.  Do I need to register or do anything to be eligible for a solo 401k or is having 1099 income sufficient?

              So say for every 1000 dollars of 1099 income, I could contribute 200 dollars - 1/2 of self employment tax.  Would this be .062 x 1000.  So would I then contribute about 138 dollars for every 1000 dollars of 1099 income assuming no expenses and all 1099 is profit?

               

              Comment


              • #8




                I would be a sole proprietor without any registered business.  Do I need to register or do anything to be eligible for a solo 401k or is having 1099 income sufficient?

                So say for every 1000 dollars of 1099 income, I could contribute 200 dollars – 1/2 of self employment tax.  Would this be .062 x 1000.  So would I then contribute about 138 dollars for every 1000 dollars of 1099 income assuming no expenses and all 1099 is profit?
                Click to expand...


                Any sole proprietor business registration/licensing would be subject to your state/local jurisdiction requirements. In my state/town there is no general requirement, but depending on the business and whether any services are performed in the home additional requirements may be necessary.

                Your one-participant 401k provider may require an EIN to adopt the plan. At a minimum, the IRS will require an EIN when your year-end balance is > $250K and you need to file a Form 5500-EZ.

                You are not understanding the employer calculation correctly. Your SE tax will be calculated based on your Form 1040 SE. For most physicians, your primary W-2 Box 3 Social Security wages will most likely exceed the Social Security maximum wage base (2019 = $132,900). This will leave only the 2.9% Medicare component of the SE tax, with 1/2 of that subtracted from your business profit, leaving the rest as self-employed earned income.

                The SE tax itself has nothing directly to do with the employer contribution limit, it is 20% of the self-employed earned income. If you have $10,000 in business profits (1099 income - business expenses) and your W-2 Box 3 is >= $132,900, your SE tax will be $10,000 * 92.35% = $9,235 * 2.9% ~= $268. Your self-employed earned income = $10,000 - (268 / 2 = $134) = $9,866 * 20% ~= $1,973 maximum employer contribution.

                Keep in mind that almost all online calculators with not calculate this scenario correctly, because they do not take into account your W-2 wages. Most tax software may not calculate your maximum contribution correctly unless you tell them that you are contributing to a SEP iRA, even if you are really contributing to a one-participant 401k. They will not account for your W-2 employee elective contributions and try to use 100% of the self-employed earned income.

                Your best option is to complete Form 1040 SE and the Deduction Worksheet for Self-Employed in IRS publication 560.

                Comment


                • #9
                  Can you elaborate on se tax calculation on 10k?  Why x 92.35 and then 2.9 again?

                  My w2> 132900 and my employee + employer contribution is about 36k.  It would be ok to make the entire solo 401k contribution as an employer?

                  Any downsides to having a solo 401k for relatively small amount of 1099 income if I do this at Fidelity?  Contributions would probably be 1k or so each year unless something changes.  I would use the account to potentially rollover my employer 401k if I leave my current job.

                  Thanks.

                  Comment


                  • #10
                    @saildawg, I am not in favor of individuals new to one-participant 401k plans using a custom plan to enable employee after-tax contributions and In-plan Roth Rollovers and/or in-service rollovers to a Roth IRA. There are just to many opportunities too make serious plan errors and have serious consequences due to a lack of complete  fundamental understanding of the rules and regulations.

                    I mean no disrespect to @Raddoc123 as they are just learning about the basics, but I think you do a disservice to them to suggest such a path until they fully understand the fundamental rules and regulations that apply to a master & prototype one-participant 401k plan with full record keeping and IRS reporting provided.

                    Comment


                    • #11




                      @saildawg, I am not in favor of individuals new to one-participant 401k plans using a custom plan to enable employee after-tax contributions and In-plan Roth Rollovers and/or in-service rollovers to a Roth IRA. There are just to many opportunities to make serious plan errors and have serious consequences due to a lack of complete  fundamental understanding of the rules and regulations.

                      I mean no disrespect to @raddoc123 as they are just learning about the basics, but I think you do a disservice to them to suggest such a path until they fully understand the fundamental rules and regulations that apply to a master & prototype one-participant 401k plan with full record keeping and IRS reporting provided.
                      Click to expand...


                      Of course, I just figured if I can learn it anyone on this forum can, but you are correct it is not for everyone.

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