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Solo 401k on top of employer 401k

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  • Solo 401k on top of employer 401k

    I have a W2 job with 401k which I'm maxing out along with a backdoor roth and HSA.

    I have started to do expert witness work and made ~12k last year, hopefully more this year.
    After obtaining an EIN, can I start a solo401k and contribute 20% of my 1099 earnings in addition to my work 401k?

    Is this the best option for lower 1099 earners? At what $ amount would it start to be beneficial to start an LLC and open up a 401k wife as well?

  • #2
    Yes you can have the solo 401(k) and contribute up to ~20% of your 1099 income to your solo 401(k).

    Simply opening an LLC of which you're the only member does nothing for your taxes. Google "disregarded entity".

    Most people open an LLC with the intent to elect for the LLC to be taxed as an S-corporation. That would be a bad idea for your situation because you'll pay more in taxes than you'll save. It has to do with how the employer portion of the social security taxes gets calculated.

    I only recommend S-corporations for clients who do 100% (or nearly 100%) of their work on a 1099.

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    • #3
      Small addition to DavidGlennCPA’s excellent response: the calculation for contribution amt for sole prop’s is 20% of [net profits less (1/2 related FICA taxes)]. I bring this up b/c a client “notified” me in a Jan mtg that they had some personal (not s-corp) 1099 income in 2020 and had set up a solo-k for each spouse and contributed 25% of the full 1099 amount (wrong on so many levels). Of course, these amounts were PS only. Famous last words, “I guess I should have checked with you first, huh?”

      Not a lot of 1099 income, fortunately, but definitely an unnecessary hassle to try to get fixed. Unfortunately, I think they were just trying to be nice and not bother me, which kind of backfired.
      Last edited by jfoxcpacfp; 07-28-2021, 05:56 PM. Reason: Changed “addiction” to “addition”
      Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        I have read that "As long as the two businesses you work for have no legal overlap or affiliated relationship, You can contribute $58,000 per job as follows allowing for $116,000 per individual in 2 401(k)".

        Why would this not apply in this case? Is there legal overlap of my expert witness work and normal doctor duties?

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        • #5
          Originally posted by xcoldricex View Post
          I have read that "As long as the two businesses you work for have no legal overlap or affiliated relationship, You can contribute $58,000 per job as follows allowing for $116,000 per individual in 2 401(k)".

          Why would this not apply in this case? Is there legal overlap of my expert witness work and normal doctor duties?
          That’s the general rule, yes. Wondering why you’re asking, though - did somebody say that it wouldn’t apply in this case? Of course, you can make only $19,500 in total employee (1:1) deferrals among all sources of earned income. After that, it’s the 20% rule (profit sharing)
          Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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