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solo 401k for my side gig

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  • solo 401k for my side gig

    Hi there,

    This is my first post here.

    Here is some background information. I work full time and max out my 401k contribution at work. I am a partner in my practice. My practice 401k offers Roth option as well as profit sharing. Even thought I'm in the high tax bracket, I contribute 100% of my $18k as a Roth to help me with my RMDs and manipulating tax bracket when I start to withdraw. Despite the profit sharing component, we will never be able to contribute via that route due to the fact that practice has too many employees and it is not worth it (per my accountant, he has ran numbers with me and he is correct).

    I am also on staff with the local school and hospital and I have students and residents with me (I get a 1099 for this and for 2016 the amount was about $10k). I have also started speaking for a company recently (only about $1k 1099 for 2016 but will go up slowly).

    Husband and I plan to invest in real estate and have him manage. He is currently SAHD as we have little kids and that is working best for us. The real estate business will start in 2-3 years when we finish building our new home and start renting out our current home.


    Here is my question: I want to open solo 401k and contribute to it (as an employer). I am maxing out my employee contribution thru my work already but I'm paying taxes on my 1099 income and feel that I could contribute 20% of my side gig(s) income to my solo 401k as employer. This would down the road benefit as our real estate business takes off (hopefully). Hypothetically speaking, if I had opened solo 401k for 2016 and did not claim any deductions on my $10,000 1099, how much of that would I be able to contribute to my solo 401k and is it worth it (I expect higher 1099 this year).

    As a side note, my work 401k is thru John Hancock and has rather high fees (I'm going to be trying to change this for next year if I can but our advisor is saying that this is best for small business for right now) if I open solo 401k somewhere else (thinking Fidelity) then I would just max my work contribution for my primary job and have the rest at Fidelity.


    Thanks for help!

  • #2
    The solo 401k employer contribution for a sole proprietor is 20% of net self employment income = net business profit - 1/2 SE tax. The SE tax will vary depending on what your W-2 Social Security (SS) earnings and net self-employment income are.

    If your W-2 SS earnings + your net self-employment income <= SS max wage base (2017 = 127,200). Then your SE tax on $10K net business business profit = $10K * 0.9235 * 0.153 = $1,413. Your maximum employer contribution would be $10K - $706 = $9,294 * 0.20 = $1,859.

    The real estate business income may or may not qualify for a solo 401k. Most real estate income is considered passive income reported on Schedule E and not compensation to make retirement contributions.

    There are fairly restrictive IRS requirements to be considered in the business of real estate earning compensation eligible for retirement plan contributions.


    • #3
      John Hancock is a great company...for advisors  
      My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
      Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


      • #4
        WCICON24 EarlyBird
        @Brownie73 Solo 401k Contributions have multiple components, among those are the (a) employee-deferral and (b) employer profit-share. The employee-deferral limit is annual "unified" per-employee limit covering all plans in which an individual participates; i.e., you can't double-up on employee-deferral contributions by participating in multiple plans. In contrast, the employer profit-share limits are "per-plan" and you can, therefore, double-up on those.

        However, key tax and retirement plan concepts to be aware of are "controlled group rules" and "affiliated services group rules." These rules require the aggregation of plans sponsored by related businesses - under certain circumstances. A Solo 401k Plan can offer incredible tax and investment flexibility, but it must be a Solo 401K Plan. A plan that is required to be aggregated with other plans sponsored by businesses which have full-time employees would not qualify as a Solo plan. In your scenario, in which you're a partner in a practice, implementation of a Solo 401k for a "side gig" should be analyzed within the context of the "controlled group rules."

        Info and many tax code citations regarding controlled group rules: