Setting up Solo 401K

[spiritrider]

You didn't indicate whether she has primary W-2 employment with a 401k/403b and will make an $18K employee deferral.

The $18k employee deferral is per person across all plans.

Regardless of the above, she will be able to make employer contributions of 20% of net self-employment income (net business profit - 1/2 SE tax).

It would make no sense in this case to add you as an employee. Any employer contribution you would receive would only decrease hers.

It would also make no sense to make Roth 401k contributions. A two physician household will clearly be in a high marginal tax bracket.

We do backdoor Roth IRA contributions as additional tax advantaged space.

[MPMD]

Just FYI i got some advice on this from Fox CPAs.

1. Not great to use EIN both for nanny and moonlighting b/c that almost implies that the nanny is working for your ML biz.

2. Can't always get mult EIN from IRS though.

3. FYI Fidelity does not require EIN for solo 401k but also does not allow mega-Roth

[pdsquash83]

Per the IRS (https://www.irs.gov/retirement-plans/one-participant-401k-plans),

Contribution limits for self-employed individuals

You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

• one-half of your self-employment tax, and


• contributions for yourself.

So I know that I am doing this right:

Lets say I made 100k as a 1099. I made my 18k employee contribution. I think the maximum I can contribute to my solo 401k is:

100,000-(18,000)-(100,000*7.65% for SE tax)= 74,350. From that number, do I multiple it by 20%? Getting me to approximately a $14,870 employer contribution?

 

They reference the tables in publication 560 but I can't find them.....

[Dr P]

Any opinions on the best place to set up a solo 401k?  Most of my investments are in Vanguard, but I've heard people mention Schwab for this account.

Thanks

[spiritrider]

pdsquash83 wrote:

Per the IRS (https://www.irs.gov/retirement-plans/one-participant-401k-plans),

Contribution limits for self-employed individuals

You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

• one-half of your self-employment tax, and


• contributions for yourself.

So I know that I am doing this right:

Lets say I made 100k as a 1099. I made my 18k employee contribution. I think the maximum I can contribute to my solo 401k is:

100,000-(18,000)-(100,000*7.65% for SE tax)= 74,350. From that number, do I multiple it by 20%? Getting me to approximately a $14,870 employer contribution?

They reference the tables in publication 560 but I can’t find them…..

Click to expand...

First complete Form 1040 Schedule C to determine your net business profit. This will be your $100K 1099 - expenses = < $100K.

Next complete Schedule SE. The first thing Schedule SE does is multiply the net business profit * 0.9235 to equalize this to what an employee would pay. Then depending on whether/how much you have W-2 Social Security wages, your SE tax rate will be from 2.9% - 15.3%.

Finally, you will want to complete the Deduction Worksheet for Self-Employed.

In Publication 560, look in the table of contents for Chapter 5. Table and Worksheets for the Self-Employed, which you will find starting on page 22.

In the simplest example where you have $100K in 1099 income, no expenses and no other sources of income. Your  1/2 SE tax will be $100K * 0.9235 * 0.153 / 2 = $7,065. Your net self-employment earnings will be $100K - $7,065 = $92,935.

Since you have no other sources of income you will be able to make the full $18K employee deferral and $92,935 * 0.20 = $18, 587 in maximum employer contributions.

 

[spiritrider]

Dr P wrote:

Any opinions on the best place to set up a solo 401k?  Most of my investments are in Vanguard, but I’ve heard people mention Schwab for this account.

Thanks

Click to expand...

It really depends on what you want. There is no one size fits all for everyone. I posted a response sometime ago that listed all the options at all the main providers. I don't have that handy. but from memory.

Vanguard's Individual 401k has the best index fund selection, offers Roth 401k,  but does not offer the lower cost Admiral Shares in their i401k, does not accept rollovers, does not allow loans and does not allow employee eligibility restrictions.

Schwab's Individual 401k has a limited index fund selection, does not offer a Roth 401k, last I knew has the lowest cost index funds for a 3 fund porfolio, does accept rollovers, does not allow loans and does allow employee eligibility restrictions.

Fidelity's Self-Employed 401k has good index fund selection, does not offer a Roth 401k, most of their premium index fund expense ratios <= equivalent Vanguard Admiral Share expense ratios, does accept rollovers, does not accept loans and does allow employee eligibility restrictions.

ETrade and TD Ameritrade are two other low cost one-participant 401k providers. Notably TD Ameritrade offers a Roth 401k and accepts rollovers.

[pdsquash83]

Thanks for this

spiritrider wrote:

pdsquash83 wrote:

Per the IRS (https://www.irs.gov/retirement-plans/one-participant-401k-plans),

Contribution limits for self-employed individuals

You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

• one-half of your self-employment tax, and


• contributions for yourself.

So I know that I am doing this right:

Lets say I made 100k as a 1099. I made my 18k employee contribution. I think the maximum I can contribute to my solo 401k is:

100,000-(18,000)-(100,000*7.65% for SE tax)= 74,350. From that number, do I multiple it by 20%? Getting me to approximately a $14,870 employer contribution?

They reference the tables in publication 560 but I can’t find them…..

Click to expand…

First complete Form 1040 Schedule C to determine your net business profit. This will be your $100K 1099 – expenses = < $100K.

Next complete Schedule SE. The first thing Schedule SE does is multiply the net business profit * 0.9235 to equalize this to what an employee would pay. Then depending on whether/how much you have W-2 Social Security wages, your SE tax rate will be from 2.9% – 15.3%.

Finally, you will want to complete the Deduction Worksheet for Self-Employed.

In Publication 560, look in the table of contents for Chapter 5. Table and Worksheets for the Self-Employed, which you will find starting on page 22.

In the simplest example where you have $100K in 1099 income, no expenses and no other sources of income. Your  1/2 SE tax will be $100K * 0.9235 * 0.153 / 2 = $7,065. Your net self-employment earnings will be $100K – $7,065 = $92,935.

Since you have no other sources of income you will be able to make the full $18K employee deferral and $92,935 * 0.20 = $18, 587 in maximum employer contributions.

 

Click to expand...

Thanks for this but I am curious then what does this refer to:

• contributions for yourself

I thought that was your employee contribution.

[Dr P]

Thanks, spiritrider, I appreciate the feedback.

 

I was curious how you'd approach this scenario.

One doc who owns two practices in two states with separate tax IDs.

Practice A has one full-time employee and an anticipated 100k of net 1099 income.

Practice B has a part-time employee and also has an anticipated 100k of 1099 income.

 

My thoughts were to open a solo 401k in Practice B.  And according to your explanation above, put 18k in employee contributions and another approximately 18k in employer contributions.

She could also open a 401k plan (not solo) for Practice A, and contribute another ~18k as an employer contribution?

 

Am I correct that since she is self-employed in both practices, her employer contribution limit is $54000-$18000 = $36000, even if her income would allow for a larger contribution?

 

Thanks for all the help.

[csbest]

Theoretical scenario: I have a main W2 gig and contribute the max to the 401k through that job. I also have 1099 income of about $24K per year and open up a solo 401k. If I'm understanding correctly, I can only contribute about 20% of the 1099 income to the solo 401k, correct? Can I siphon off any of the income earned through my W2 income into the solo 401k that the 1099 gig allowed me to open up? Thanks!

[spiritrider]

No, one-participant 401k employer contributions can only be 20% of your net self-employment earnings (1099 income - expenses - 1/2 SE tax).

[csbest]

Got it - thanks! Whatever I'm able to contribute to the solo 401k is tax deductible, right? What's SE tax and how do I calculate that? Sorry!

[spiritrider]

All 401k pre-tax employee elective deferrals and employer contributions are deductible, 401k employee elective designated Roth contributions are not.. SE tax is Self-Employment tax and is calculated on Schedule SE. The best way to calculate all this is with Schedule C/SE entries using tax software.

[Udoerasmus]

Dr. Mom wrote:

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!

Click to expand...

Great information.

I'm still trying to decide which solo 401k to go with.  I've heard that Etrade allows you to do rollovers into the plan from a pre-existing 401k as well as after tax contributions that can than be transferred into a Roth IRA.  Is this true?  Are there any solo 401ks that allow this?

[tomato14]

Looking to setup a solo 401K for my spouse (not a physician), who's a 1099 worker with <$40K salary.  A couple of questions:

(1) Do her backdoor ROTH IRA contributions effect how much I can put into her solo 401K or vice versa?

(2) And should it be a ROTH 401K or a non-ROTH 401K?

(3) With my medical group we have a non-qualified deferred compensation plan.  Other than a backdoor ROTH IRA and HSA, is there another tax deferred retirement vehicle I could be using?

thanks.

 

[jfoxcpacfp]

1. No. The IRA is "Individual". The "401k" is "Employer" and the limits have no bearing on each other.


2. For flexibility, I recommend that you get the Roth option with your 401k. This allows her to contribute to either Roth, pre-tax (traditional) or a combination of both, depending upon your goals and your tax strategies.


3. Yes, you could look into setting up a Defined Benefit Plan.

Don't focus solely on tax-deferred strategies for saving for retirement. Taxable accounts and, for some, real estate should have a place in your comprehensive plan, also.