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  • Solo 401K post business sale...

    Unique scenario. Had 39% ownership in a LLC that sold to an equity backed group end of Oct. Had the organization structured with the LLC (several employees) as pass through entity holding all assets and dividing/passing profits to my personal SCorp and my business partners C-Corp. Post acquisition I'm no longer a stakeholder in the LLC and have become a W2 employee of the LLC. I am being put on the new parent company benefits package which includes a 401K. Problem is, due to the timing of this transaction they are not moving us/me to their benefits until Jan 1, 2020 and I am unable to contribute to the 401K till then. I had a substantial payout as part of the acquisition so am trying to leverage any and all tax advantaged vehicles possible. Have already done a backdoor Roth for myself and my wife but have not historically had any vehicles at the LLC or my SCorp level because it wasn't something the majority partner wanted to entertain. Couldn't do a solo 401K in my SCorp d/t my ownership % in the LLC. My SCorp has always only had myself as an employee and I run a W2 payroll for myself through it of $87K yearly and have the rest pass through as draws. My questions...

    1. Now that I am not a stakeholder in the LLC and am the only employee within my SCorp, can I establish and max out a solo 401K by the end of the year since I am not allowed to participate in the company 401K till Jan 1st?
    2. Could I contribute to the company plan for 2019 after Jan 1st?
    3. If I can do the solo 401K through my SCorp, max contribution would = $19K personal + 20% of my $87K W2 compensation through the SCorp?
    4. I have been told that only the employee contributions can be done as Roth contributions within a solo 401K. Employer contributions are mandatory pre-tax. Is this true?

    Sorry for novel. In a situation where my CPA is telling me to seek an adviser and the advisers I talk to tell me I need to ask my CPA. Plus the advisers all want silly $ to manage a solo (IMO) and with this likely being a one time thing, I am looking to manage myself through Vanguard. Not looking for authority answers here, but simply some guidance. Really hoping spiritrider would chime in as I have seen from other threads they seem to have a lot of insight into this area. I'm not new to the forum as a reader but am for sure a new contributor. Also a fairly new investor. I come here often seeking wisdom and hope to be wise enough some day to actually contribute.

  • #2
    Posting not because I have a definitive answer, but because I am hoping spiritrider or Kon are prowling the forum and happen to run upon this, as it’s really difficult to see all of the threads and easy to miss. However, I’ll take a stab at #1 and I know the answers to the rest:
    1. The ability to open a retirement plan and the impacting factors are not based upon your status on the last day of the year but on facts and circumstances for the full year. Your business had other qualified employees in 2019 due to your common partnership interests and no, you cannot start a solo-k for 2019.
    2. No, you cannot contribute through your new employer to a 401k for 2019 in year 2020. That is possible to do only for in solo-k’s (already established in prior year) and SEPs.
    3. That would be correct, if possible.
    4. That is correct. Given that you are seeking to reduce your taxable income, however, just curious: why did you ask?
    Given that you have not been able to utilize a retirement plan through work, I suspect you may have a large brokerage (taxable) account. If so, this would be a perfect opportunity to open and fund a DAF with appreciated stocks for 2019, assuming you are charitably inclined. This is definitely an area your CPA can help you with by running tax projections to determine the level of tax savings at various contribution amounts.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      You paid yourself $87k and did the rest as pass-through? How did you choose that number? That’s really really low. Probably too low to justify as reasonable assuming you are an opthomologist as your name suggests. Otherwise I agree with Johanna. Even if possible (which it isn’t) doing a Roth 401k option is unlikely to make sense unless that 87k represents nearly all your income.
      Last edited by DCdoc; 11-16-2019, 07:38 AM.

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      • #4
        Too many pieces to the puzzle to get an answer here that I think you could reliably act on, especially when the tax savings you’re talking about based on retirement contributions from a W2 salary of $87k from your S Corp are not that great, relative to the hassle, and risk of causing a big headache acting on advice from people on the internet

        it may be a moot point anyway because S Corp 401k contributions need to be withheld from payroll. So, no contributions could happen from payrolls that you’ve already run in 2019.

        I would second the point made that $87k is an unreasonably low salary if you’re a physician practicing full time.

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        • #5
          Originally posted by Eyes84 View Post
          Unique scenario. Had 39% ownership in a LLC that sold to an equity backed group end of Oct. Had the organization structured with the LLC (several employees) as pass through entity holding all assets and dividing/passing profits to my personal SCorp and my business partners C-Corp. Post acquisition I'm no longer a stakeholder in the LLC and have become a W2 employee of the LLC. I am being put on the new parent company benefits package which includes a 401K. Problem is, due to the timing of this transaction they are not moving us/me to their benefits until Jan 1, 2020 and I am unable to contribute to the 401K till then. I had a substantial payout as part of the acquisition so am trying to leverage any and all tax advantaged vehicles possible. Have already done a backdoor Roth for myself and my wife but have not historically had any vehicles at the LLC or my SCorp level because it wasn't something the majority partner wanted to entertain. Couldn't do a solo 401K in my SCorp d/t my ownership % in the LLC. My SCorp has always only had myself as an employee and I run a W2 payroll for myself through it of $87K yearly and have the rest pass through as draws. My questions...

          1. Now that I am not a stakeholder in the LLC and am the only employee within my SCorp, can I establish and max out a solo 401K by the end of the year since I am not allowed to participate in the company 401K till Jan 1st?
          2. Could I contribute to the company plan for 2019 after Jan 1st?
          3. If I can do the solo 401K through my SCorp, max contribution would = $19K personal + 20% of my $87K W2 compensation through the SCorp?
          4. I have been told that only the employee contributions can be done as Roth contributions within a solo 401K. Employer contributions are mandatory pre-tax. Is this true?

          Sorry for novel. In a situation where my CPA is telling me to seek an adviser and the advisers I talk to tell me I need to ask my CPA. Plus the advisers all want silly $ to manage a solo (IMO) and with this likely being a one time thing, I am looking to manage myself through Vanguard. Not looking for authority answers here, but simply some guidance. Really hoping spiritrider would chime in as I have seen from other threads they seem to have a lot of insight into this area. I'm not new to the forum as a reader but am for sure a new contributor. Also a fairly new investor. I come here often seeking wisdom and hope to be wise enough some day to actually contribute.
          Looks like everything Johanna wrote is correct. Nothing can be done other than paying down debts and contributing to a taxable account.

          The big question is, who is the employer? If the employer is the LLC, then only the plan set up for the LLC can be contributed to. Individual S corp is meaningless here. If the income came from the S corp providing services directly (and the S corp would be the employer), in that case you could make a contribution, but this is not what you have.
          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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