Setting up Solo 401K

[JoeSmith]

Thanks WCI for all the valuable information.

Question about setting oneself up for using a Solo 401K.

I am part of a physician-owned group where I am paid through a W2 and everyone maxes the 53K contribution to a 401K as a nonelective employer contribution, so I don’t believe I’m using any of my 18K employee contribution limit.

If I begin to take on separate consulting or legal expert work, I gather that I can contribute 100% of the first 18K of that money (“employee contribution”) to a solo 401k, and then 18-19% of any money I can make beyond that (“employer contribution”, second unrelated employer).

Question is, what do I have to set up in order to do that?
Can I do it just as an individual person receiving 1099 income?
Or do I need to incorporate as Joe Smith Consulting first (pretend my name is Joe Smith) , and then pay myself with a 1099 from Joe Smith Consulting? Does that then obligate me to figure out how to pay payroll taxes and file corporate tax paperwork every year? Have a separate bank account registered to Joe Smith Consulting, deposit checks from my consulting work into that account and then issue a check from Joe Smith Consulting to Joe Smith? And then set up a solo 401k in the name of Joe Smith? Or in the name of Joe Smith Consulting?

I’m otherwise uninitiated in the world of LLCs, sole propriotorships, S corps, and C corps, etc and would never have been interested in them other than for the possibility of shielding some additional income for retirement.

In addition to the 53K (54 this year) to my group 401k, a backdoor Roth, and my kids 529 account, I still have financial room to put more away if legally possible.

Thanks!

[DMFA]

You don't need to incorporate. Checks made out to you or directly deposited to your account are acceptable. They should furnish you a 1099 at year's end for tracking purposes, for which you will be responsible for all taxes, including the employer portion of SS/MCR.

You should be able to make both employee and employer contributions to an indie 401(k) if all the contributions from your W-2 job are employer.

[Dr. Mom]

I did not incorporate.  Basic steps of what I did:

1.  Get EIN online.

2.  Open Solo 401k.  I used Schwab.

3. Deposit 1099 income into separate account to keep accounting easy.  Use EIN instead of SSN to give to employers.

4. Start contributing to 401k.  Review rules of how much you contribute.  It is not 100%, but 92.35% as you have to take self-employment tax into account.  It's not hard to figure out.  Just check irs.gov site on One Participant 401k's.

5. Decide if worthwhile and what to deduct.  These deductions may effect how much you put into your 401k but you sure get some good tax breaks owning your own business!

6. Depending on how much you make, you could need to send in quarterly tax payments.

7.  Best trick if you have any nondeductible basis in a Traditional IRA.  Roll the deductible part to your 401k and simultaneously convert the nondeductible basis to a Roth.  Be careful with prorata rules if you have more than one Traditional IRA/SEP-IRA/Simple IRA (I did not).

Good luck!

[arnee05]

I have an EIN that my family used to employ a nanny briefly. I am opening a solo 401k now for 1099 income I obtain from a moonlighting job. Do I need to obtain a new/separate EIN for this income?

[jfoxcpacfp]

arnee05 wrote:

I have an EIN that my family used to employ a nanny briefly. I am opening a solo 401k now for 1099 income I obtain from a moonlighting job. Do I need to obtain a new/separate EIN for this income?

Click to expand...

Yes, you shouldn't mix the two. The reason is that the nanny is for you personally even it is though for the convenience of your work, so you need a separate EIN for your business. It just makes everything cleaner.

[arnee05]

Thanks, Johanna - one more clarification. Given I moonlight and earn 1099 income from this, on questions asking for employer name (by IRS and solo 401k application), is that myself or the hospital that pays me? Along that line, when asked for EIN, would I Iist my own EIN or the hospital who pays me? Reason I ask is that I got a denial code (101?) When trying to get a second EIN # from the IRS (first EIN for paying a nanny). Seems like I should have my own EIN so that I can use this same solo 401k acct if I moonlight for another hospital.

However looking at this, it doesn't seem like I need one?
https://www.irs.gov/businesses/small-businesses-self-employed/do-you-need-an-ein

Thanks.

[archdelux]

Yeah - Im a bit confused - why would we need an EIN? I thought we can just put our SS number on W4 forms and there is never a need for an EIN?

[spiritrider]

A one-participant plan must have an employer as a sponsor. Such an employer needs to have an EIN to associate with the plan. The adoption agreement at one-participant plan providers require an EIN for the employer.

Arnee05:

The fifth line in your link refers to a Keogh plan. This was the predecessor to the current one-participant 401k plan which was superseded in 2002. That is the reference for the requirement of an EIN for a one-participant 401k plan.

[jfoxcpacfp]

spiritrider wrote:

A one-participant plan must have an employer as a sponsor. Such an employer needs to have an EIN to associate with the plan. The adoption agreement at one-participant plan providers require an EIN for the employer.

Click to expand...

Is this true for schedule C filers? My understanding is that an SSN is all that is required by the IRS and not all SOLO-k plan providers require the additional number (I know because I have a few clients who have used their SSNs). My understanding, also, is that the requirement for an EIN will soon be in place for all plan providers, just not yet.

archdelux wrote:

Yeah – Im a bit confused – why would we need an EIN? I thought we can just put our SS number on W4 forms and there is never a need for an EIN?

Click to expand...

That said, when you are setting up a plan, I recommend that you get the EIN. It takes only a few minutes and it's one less place that you divulge your SSN. EINs are not a target for ID thieves but SSNs are.

[jfoxcpacfp]

arnee05 wrote:

Thanks, Johanna – one more clarification. Given I moonlight and earn 1099 income from this, on questions asking for employer name (by IRS and solo 401k application), is that myself or the hospital that pays me?

Click to expand...

Sorry for the delay in answering this. The employer name is your business's name, not the hospital. Since you are receiving 1099 income, you are not an "employee" of the hospital but you are employed by your business. Iow, even though you and the business are one and the same, you wear both hats, as both employer and employee.

arnee05 wrote:

Along that line, when asked for EIN, would I Iist my own EIN or the hospital who pays me? Reason I ask is that I got a denial code (101?) When trying to get a second EIN # from the IRS (first EIN for paying a nanny).

Click to expand...

You would list your own EIN. Next January, you will receive a 1099 from the hospital. Your EIN will be listed as the recipient of the income and the hospital will be listed as the payor of the income.

You most likely got the denial code because the IRS doesn't like for the same person to file for 2 separate EINs electronically. Have you gotten this resolved yet?

[Dr. Mom]

At Schwab, they required an EIN to set up the solo 401k.  I used them because they accept rollovers.  My business name is just my name.  Our accountant will add the EIN on our tax forms next year for completeness, not because the IRS requires it.  Once you have the EIN you can use it instead of your SSN as an independent contractor to give to the entities paying you if, like me, you get concerned with how often we give out our SSN's.  We had an identity theft issue several years back, so I think about giving out my personal SSN much more than I used to.

[enelson]

Just looking for ideas on a personal 401K I'm setting up for my wife who is also a physician. She's starting per diem work at an independent contractor for a hospitalist program and the number of weeks she will work is unpredictable. Should I just contribute a lump sum at the end of each calendar year? How best to calculate? I'm looking to contribute near 100% of her earnings to the 401k and I don't think she'll get close to the limit of $54k. Appreciate any help or resource suggestions. Appreciate the ideas in this thread so far!

[Michael George]

You may want to consider doing a Roth Individual 401(k).

Currently TD Ameritrade offers both a regular and a Roth Individual 401(k).

Currently Schwab and Fidelity offer the regular Individual 401(k), but not the Roth option.

Also, spouses can be included in an Individual 401(k) plan.  So you may be able to do put twice as much into a Roth 401(k).

 

[DMFA]

enelson wrote:

Just looking for ideas on a personal 401K I’m setting up for my wife who is also a physician. She’s starting per diem work at an independent contractor for a hospitalist program and the number of weeks she will work is unpredictable. Should I just contribute a lump sum at the end of each calendar year? How best to calculate? I’m looking to contribute near 100% of her earnings to the 401k and I don’t think she’ll get close to the limit of $54k. Appreciate any help or resource suggestions. Appreciate the ideas in this thread so far!

Click to expand...

You are limited to $18,000 across *all* 401(k) and 403(b) accounts combined for employee contributions.

Each employer may contribute up to 25% of W-2 wages or, if self-employed, 20% of net profit as the employer "profit-sharing" contribution up to a total of $54,000 per unrelated employer account.

Is she otherwise employed, or is that her only job? She'll have to make a bit over $180,000 in net profit to be able to get the full $54k if she had no other employee contributions, and a bit over $270,000 if she can only make employer contributions.

You'll have to explain to me the part about including spouses on individual 401(k) plans. I'd only heard of that if each spouse has separate self-employment income or if one is employed by the other.

[enelson]

Thanks for the info. She will likely only make between 40-70k/yr depending on how many shifts they need. So would the easiest thing to do just be to contribute 18K/yr and not worry about calculating the rest (or maybe just calculate that at the end of the year).

I'm not worried about spouse contributions, I've already got a 401k, 457, and 401a for myself and a backdoor roth for both of us.