Individual 401k, question from Podcast episode #1

[saildawg]

Hello all,

I am somewhat confused after listening to Podcast episode #1 (which was great btw).  WCI states that you could do online surveys and claim earned income as a business to open up an individual 401k.  He is referring to using a 401k to roll an IRA into it.  I was intrigued about having a separate business to allow multiple 401k to increase my tax advantaged savings.  My wife and I both are W2 employed physicians in small groups, and fully fund 401k (18k each no match), HSA, backdoor roth.  Would it be possible to use survey income to create a solo 401k for each of us? It would not be a  money generating business (likely $100 a year or so).  I started reading : https://www.whitecoatinvestor.com/multiple-401k-rules/

But find myself more confused.

Thanks

 

Edit: Seems like I totally missed rule #3 that employer contributions are 20% net earnings, that would make this scenario irrelevant

[RandomERdoc]

It seems as though you found to answer to your own question.  Nevertheless, if you or your wife have any money in an existing IRA, you can create a solo 401k as a destination for any potential rollovers.  Otherwise, unless you plan to bang out thousands of surveys, or make additional money as a 1099 employee in some another fashion, no real benefit to a solo 401k.

[saildawg]

Thanks, I figured it out a few minutes after posting.

[Peds]

as an employee you are only allowed 18K total, it doesnt matter how many 401ks you have access too. as an employer however you can contribute to complete up to 53K. and it seems you already found the restriction on that.

the podcast is specifically referring to getting around the prorata rule.

[DMFA]

That's 18k across ALL 401k's in elective deferrals, and 53k max for EACH unrelated employer 401k in elective deferrals plus employer contributions.

The most you can contribute to an individual contractor 401k as an employer contribution is 20% of net profit (after expenses and half of self-employment tax).

So if you only make $1,000 taking surveys and claimed $400 of business expenses on Schedule C, your net profit is $600 (schedule C line 31). Half your self-employment tax is 7.65%, leaving you with $554.10. You can contribute up to 0.2 * 554.1 = $110.82 to that 401k as employer contribution.

Now, that paltry bit isn't going to make you any mad money...*but* it allows you to create the account so as to be able to roll other pretax accounts into it (like TIRAs) so as to have zero in them and no longer be subject to the pro rata rule. (I don't even know if you can open an account with that little 1099 amount).

[brownie73]

DMFA wrote:

That’s 18k across ALL 401k’s in elective deferrals, and 53k max for EACH unrelated employer 401k in elective deferrals plus employer contributions.

The most you can contribute to an individual contractor 401k as an employer contribution is 20% of net profit (after expenses and half of self-employment tax).

So if you only make $1,000 taking surveys and claimed $400 of business expenses on Schedule C, your net profit is $600 (schedule C line 31). Half your self-employment tax is 7.65%, leaving you with $554.10. You can contribute up to 0.2 * 554.1 = $110.82 to that 401k as employer contribution.

Now, that paltry bit isn’t going to make you any mad money…*but* it allows you to create the account so as to be able to roll other pretax accounts into it (like TIRAs) so as to have zero in them and no longer be subject to the pro rata rule. (I don’t even know if you can open an account with that little 1099 amount).

Click to expand...

I just posted a question similar to this today but sounds like you've already answered it here. Help me with the 7.65%....so even thought I'm IC with my side gig, I don't have to pay the employer portion of FICA...correct? So I made $10k in 1099 last year, therefore, I could contribute up to $1,847 to my solo 401k (pending I claim no deductions). My math: $10,000*0.9235 = $9,235 of profit then * 20% = $1,847 my max solo 401k contribution. Am I doing this right?
Thanks for help!

 

[ENT Doc]

DMFA, isn't the SE tax calculated by:

Net Income x 0.9235 x .153?

 

The short and long form of Schedule SE have this 0.9235 multiple, which effectively reduces the tax (and deduction), which makes the employer contribution higher than in your above example, no?

[ENT Doc]

Brownie, you have to pay both the employer and employee portion of FICA - check out Schedule SE.  It stinks, I know.  But if you're not contributing any other employee amount to a retirement plan you can actually contribute that entire $10,000 as an employee.  You would then not be allowed to contribute anything as an employer.  If you are already at the $18,000 contribution limit then you're limited to the employer contribution only, which would be calculated as follows:

$10,000 x 0.9235 x .153 x 0.5 = Deductible Portion of SE Tax = $706.48

($10,000 - $706.48) x 0.2 = Max Employer Contribution = $1,858

There's also a worksheet on Pub 560 that takes you through the above calculation for determining the max employer contribution if you want to double check things.  It's the same calculation that a SEP uses.