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  • Adding spouse to solo 401k

    My wife has a home business with no employees. She makes contributions to a solo 401k at Fidelity. In addition to my physician day job, I was hoping to add myself as an employee to her business so I could open solo 401k for myself. It seems there are two ways to do this: 1. Get paid as a W2 employee 2. Operate Business as a Qualified Joint Venture.

    I'm trying to figure out the pros and cons of each approach in terms of tax efficiency and amount of paperwork required. I know for a W2 employee my pay has to represent "fair market value" and for a qualified joint venture, I have to have "material participation" in the business. Which of these standards is more lenient?

    If it changes anything, I max out a 401k with my day job with full 18k employee contribution. I'm also above the maximum wage base for social security.

    Thanks for the help. I've learned so much from the blog and the community on this message board

     

  • #2
    The Fair Market Value is pretty straight forward. You have to page a wage that is comparable to the tasks being performed. If your spouse is performing adminstrative tasks, the pay has to reflect that.

    The bigger problem than the pay, is that you have to justify the number of hours performing those tasks that generates enough wages. Also, there is the complexity and/or costs to run payroll.

    It is far far easier to meet the material participation standards of a qualified joint venture. Depending on which category you are targeting 2 - 10 hours / week is sufficient. Also, all you need to do is each file a Schedule C/SE.

    The QJV is far more valuable when both spouses are making employee deferrals. The total employer contributions will still be the same amount when split between two spouses.

    However, it can still valuable if the net self-employment income is >= $180K, because that is all that is necessary to make an $18K employee deferral and a $36K employer contribution = $54K. Any amount above that would be wasted employer contribution space.

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    • #3
      Unless your wife is already subject to payroll requirements (i.e. has an employee who is not qualified to participate in 401k), the QJV will be simpler. If the purpose of your solo-k contribution (which you didn't provide) is only to establish a receptable to pour IRAs and retirement plan rollovers into, however, you need only do minimum work for minimal pay to qualify. In that case, you could pay yourself once annually in December and have minimal filing requirements (as an employee). This might be my choice, if applicable, particularly if your wife wants to keep her business to herself, which would be understandable.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        Thanks for the feedback both of you.

        The purpose of opening the account was to increase our tax advantage space, but also to allow me to open a solo401(k) that I could roll the 401k from my current employers into it I ever decide to change jobs.

        You make a good point about the 180k threshold. If her profits don't exceed that, then the combined amount we would be able to put away together doesn't increase by me opening a separate account.  Her business is doing really well and should probably end up around that threshold or a little bit higher. If I think the profits are going to be around that level, I would probably take Johanna's suggestion and pay myself once in December so I can open the account.

        On the other hand, if her profits continue growing in the latter half of the year, I could miss out on some tax savings by not going be QLV route.

        What is the cut off for deciding which route to go? Do I have to declare that the business is a QLV now or just let the IRS know when I submit two schedule Cs with our 2017 taxes?

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        • #5
          You will file an election to be a QJV (Qualified Joint Venture) with your income tax return. Keep the material participation rules that @spiritrider mentioned in mind.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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