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Worth starting i401k for spouse?

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  • Worth starting i401k for spouse?

    Situation: currently FT physician. Wife used to work full time as a midlevel but has stopped the past couple years to raise our children. She recently did a couple article reviews for one of her professional magazines and was paid $1000 for it. That was her only income for the year. Her plan is to eventually go back to work part time, but that likely won't be for a few more years. We have no idea if this will be a one time thing or she will make periodic income in the future. I currently have an i401k with Vanguard and my question is essentially if I should set one up for her and invest.

    Reasons to open i401k and invest:
    -Given she has no other income, my understanding is she could put the entire $1000 in the i401k as the employee, saving on federal/state taxes (but not payroll). Not a world of difference, but nevertheless, it is still money saved.
    -Would give us an account already setup in the event she does any work in the future, either one off jobs or eventually when she goes back to work part time in a few years (if she goes 1099).
    -We don't currently have a traditional or SEP IRA or old retirement accounts from previous jobs but I suppose the i401k always gives us a place to put that money in the future (although I think that might be an issue with Vanguard).

    Reasons not to open i401k:
    -A decent amount of work (setup and managing ongoing Vanguard documents) for such a small investment. Likely only a few hundred in tax savings at my marginal tax bracket.


    All in all, I was thinking of setting it up because I'm the person who hates to "leave any money on the table." But figured I'd get the thoughts from the rest of the group here. My understanding is the i401k account needs to be setup by 12/31 but I have until 4/15 to actually contribute/invest the $1000. Thanks!

  • #2
    perhaps a dumb question but are you sure she's paid as a 1099 and not a W2? If so, then sure set it up. It's actually my understanding that an i401k really isn't that hard to set up. It's not an issue now but be aware Vanguard i401k plans don't accept rollovers into the plan. If you know vanguard best and are most comfortable there, set it up there and you can roll it over to another place sometime in the future when you wish

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    • #3
      Similar situation, my wife works very part time to the tune of a couple grand/year. I opted to open the i401k, as it was actually a relatively painless process and as you mentioned, her entire check goes into it to save on taxes

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      • #4
        Originally posted by JK View Post
        -Given she has no other income, my understanding is she could put the entire $1000 in the i401k as the employee, saving on federal/state taxes (but not payroll). Not a world of difference, but nevertheless, it is still money saved.
        Originally posted by 8arclay View Post
        Similar situation, my wife works very part time to the tune of a couple grand/year. I opted to open the i401k, as it was actually a relatively painless process and as you mentioned, her entire check goes into it to save on taxes


        Both of the above isn't correct. Your net earnings is business profit minus the deduction for one half of your self-employment tax.

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        • #5
          Thank you for the clarification, I had misunderstood this. Found a couple online calculators as well, luckily Ill be able to correct it by years end. Only a couple hundred bucks difference so still worth it in my opinion

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          • #6
            I'm actually looking at an i401k for my wife as well. She's going to bring in about 24k a year in 1099 work. I'm figuring we'll max the personal contribution. I haven't decided if it is worth it to put employer contributions in or not.

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            • #7
              I could be wrong but I believe you can only put 20% of 1099 income into the i401k. So I believe she could only put $200 of that in there.

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              • #8
                Originally posted by Debt Free DDS View Post
                I could be wrong but I believe you can only put 20% of 1099 income into the i401k. So I believe she could only put $200 of that in there.
                incorrect
                20% is the employer contribution limit
                the OP spouse in this case does not participate in another 401k and therefore could make an employee deferral contribution to a 401k, in this case up to 100% of net self employment earnings

                this is the best calculator (spreadsheet) for figuring solo 401k contributions. Courtesy of Harry Sit aka The Finance Buff

                https://docs.zoho.com/sheet/publishe...05e8140934898a

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                • #9
                  That link contradicts Cords determination of removing the deduction for half the self employment tax. What gives?

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                  • #10
                    No it doesn't.

                    Net earnings from self-employment reflects subtracting 1/2 SE tax from net business profits.

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                    • #11
                      Youre probably right and Im a moron doing this wroing, but when I input $6k as Compensation from self-employment, before salary deferral, without any other contributions, it spits out $6k in the summary total. Unless youre saying one needs to subtract the 1/2 SE tax as prior to considering the compensation, in which case I wish it was mentioned somewhere more clearly for dolts like me

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                      • #12
                        Originally posted by 8arclay View Post
                        Youre probably right and Im a moron doing this wroing, but when I input $6k as Compensation from self-employment, before salary deferral, without any other contributions, it spits out $6k in the summary total. Unless youre saying one needs to subtract the 1/2 SE tax as prior to considering the compensation, in which case I wish it was mentioned somewhere more clearly for dolts like me
                        you're using the Incorporated tab. Such as for an S Corp setup

                        the Unincorporated tab is the one to use for a sole proprietorship.

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                        • #13
                          Ahhhhhh, thanks. User error...carry on.

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