Solo-401k maximum contribution I can make?

[Rifampin]

Hello,

With the advice of bogleheads, I rolled over my SEP IRA at Vanguard to Fidelity's Solo-401k. For the year 2016 I worked for a home health company which did not deduct federal taxes. Year to date, I have made $87,500. My husband is listed as the plan administrator, however he contributes to his employers 401k. Many sources say that I can contribute $18,000 plus 20% of total earnings. However other sources state that I can contribute 25% of total earnings. This calculator( http://www.bankrate.com/finance/retirement/solo-401k-for-self-employed.aspx) shows that I can contribute a total of $34,263 for 2016. Is this correct?

[IMDoc]

Assuming you aren't making elective salary deferrals into any other retirement plan, you can contribute $18k into your Solo 401k. You can also contribute roughly 20% of your profit as a profit-sharing contribution. "Roughly" b/c I think it's slightly less than 20% once you account for 1/2 of self-employment taxes. My accountant just tells me every spring how much I can contribute for the previous year. If you want to contribute more, you might consider a Mega-Backdoor Roth through your Solo 401k. I am in the process of changing my Solo from Fidelity to Employee Fiduciary so I can have a custom plan that allows this. This will allow me to contribute a total of $53,000. The Finance Buff has a series of articles discussing this if you're interested.

[litovskyassetmanagement]

IMDoc wrote:

Assuming you aren’t making elective salary deferrals into any other retirement plan, you can contribute $18k into your Solo 401k. You can also contribute roughly 20% of your profit as a profit-sharing contribution. “Roughly” b/c I think it’s slightly less than 20% once you account for 1/2 of self-employment taxes. My accountant just tells me every spring how much I can contribute for the previous year. If you want to contribute more, you might consider a Mega-Backdoor Roth through your Solo 401k. I am in the process of changing my Solo from Fidelity to Employee Fiduciary so I can have a custom plan that allows this. This will allow me to contribute a total of $53,000. The Finance Buff has a series of articles discussing this if you’re interested.

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That's right, 25% is if you are taxed as an S-corp (which might be a good idea in some circumstances), and 20% or so if you are a pass-through (LLC or a sole proprietorship).  You can also do after-tax contribution that allows you to get up to $53k (since you won't max out a solo 401k with $87k), but that would require a custom plan document, just as IMDoc suggested.  EF would be way too expensive for this type of setup.  You should be able to find a standalone TPA and open a 'pooled' account at Vanguard for example (or at Fidelity/Schwab, since they also have these types of accounts).  A typical plan document should cost around $750 or so, and you'll have some ongoing admin costs, but not $1500 as EF charges (as far as I know, unless they've updated their prices).

[IMDoc]

Again, I haven't completed the process of moving my Solo from Fidelity to EF, but an email I received from EF suggests they may have changed their prices from the figure you quoted:

"It looks like we can support the mega back door Roth IRA contributions in our Solo 401(k) plans. Our normal Solo plans have a set plan document which doesn’t allow for the options needed in order to support it. We have a customizable Solo 401(k) which will, but the pricing is different. It will be $500 – one-time conversion fee, and $500 annually. The traditional Solo is $200 for the conversion and $200 annually. There will also be an additional fee of $50 for the distribution."

[jfoxcpacfp]

Another recent post on getting $53k into a 401k every year using NRATs is on my blog, in case you're interested.

[litovskyassetmanagement]

IMDoc wrote:

Again, I haven’t completed the process of moving my Solo from Fidelity to EF, but an email I received from EF suggests they may have changed their prices from the figure you quoted:

“It looks like we can support the mega back door Roth IRA contributions in our Solo 401(k) plans. Our normal Solo plans have a set plan document which doesn’t allow for the options needed in order to support it. We have a customizable Solo 401(k) which will, but the pricing is different. It will be $500 – one-time conversion fee, and $500 annually. The traditional Solo is $200 for the conversion and $200 annually. There will also be an additional fee of $50 for the distribution.”

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But the cost of plan document is still $1500? Also, EF charges 8 bps, not something I'm a fan of.  It would be better to use Vanguard's pooled account and have the TPA do the plan document for you (and file form 5500).  I would trust standalone TPAs more to do this kind of work. You should also add in-plan Roth conversions to your plan document (and eventually you might also be able to add in-plan Roth conversions of the after-tax assets as well without having to remove them from the plan to convert to Roth).  There will be future potential plan doc changes, and if EF hits you with $500 fees every time you need a change, that's a problem.  Also, lots of other small fees (such as distribution fee) - with a pooled account you don't have any of that.  And if you ever want to have a Cash Balance plan, EF plan document will most likely not work with this type of plan.  Just make sure that you know exactly what you are getting at and what all of the fees are going forward.

[IMDoc]

Thanks, Kon. I'll certainly find answers to your points before moving forward with the conversion.