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Solo 401k for dual income physician household

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  • Solo 401k for dual income physician household

    Hi everyone, tried searching extensively but couldn't find an exact answer -

    My spouse and I are both physicians. Next year he will be a 1099 independent contractor (sole prop) with estimated income > 400k. He can make his own solo 401k with 58k total employee + employee contribution.

    I am also a physician looking at two part-time job offers with 1099 independent contractor status, unrelated job from my husband's. I will be lower earning, estimated income 50-100k total. Can I also open my own solo 401k with 58k limit? I understand that both of us will be paying FICA taxes on both incomes.

    We will be married filing jointly, so does that make potential tax deduction 116k since we likely have two separate sources of 1099 income?

    Thanks in advance!

  • #2
    Yes, you can also have a solo-k and the limit is still $58k, but you won't reach that allowable threshold at $50k - $100k gross (before expenses and 1/2 of FICA) unless you use a mega BD Roth.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Thanks so much for your quick reply!

      So for example, without mega BD Roth if my income is 100k, I can only contribute 19.5k as employee and 20k as employer (20% of net self-employment income) for total of 39.5k, which would be an above the line deduction? Then I would pay 12.4% SS and 2.9% medicare tax on the rest (60.5k) for a total of 9.256k (assuming I don't take any other deductions), in addition to federal and state taxes.

      And with mega BD Roth if my income is 100k, I can contribute 19.5k as employee and (58 - 19.5 =) 37.5k as after-tax BD Roth? But then my above the line deduction would only be 19.5k and I would end up SS/medicare tax on 80.5 for a total of 12.316k (assuming I don't take any other deductions), in addition to federal and state taxes.

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      • #4
        https://thefinancebuff.com/after-tax...solo-401k.html

        See here re: megabackdoor roth
        Would cost you some to set up the custom plan, rather than the free setup at Fidelity etc

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        • #5
          Originally posted by franniemeow07 View Post
          Thanks so much for your quick reply!
          So for example, without mega BD Roth if my income is 100k, I can only contribute 19.5k as employee and 20k as employer (20% of net self-employment income) for total of 39.5k, which would be an above the line deduction? Then I would pay 12.4% SS and 2.9% Medicare tax on the rest (60.5k) for a total of 9.256k (assuming I don't take any other deductions), in addition to federal and state taxes.

          And with mega BD Roth if my income is 100k, I can contribute 19.5k as employee and (58 - 19.5 =) 37.5k as after-tax BD Roth? But then my above the line deduction would only be 19.5k and I would end up SS/Medicare tax on 80.5 for a total of 12.316k (assuming I don't take any other deductions), in addition to federal and state taxes.
          See Schedule SE, SE taxes are computed on 92.35% of Schedule C business profits. One-participant 401k pre-tax employee deferrals and employer contributions are only income tax deductions. They are irrelevant with regard to SE taxes.

          See Publication 560, Deduction Worksheet for Self-Employed. The maximum employer contribution is 20% of self-employed earned income = Schedule C business profits - 1/2 SE taxes.

          With a Mega Backdoor Roth; a pre-tax employee deferral of $19.5K, an employer contribution of 20% of self-employed earned income and an employee after tax contribution of the lesser of the amounts below can be made:
          1. $58K - $19.5K employee deferral - self-employed earned income.
          2. self-employed earned income - $19.5K employee deferral - (employer contribution * 2).
          Note: The decision on whether to do traditional (pre-tax) or Roth (post-tax) deferrals and pre-tax employer or employee after-tax contributions should take the eligibility for the qualified business income (QBI) deduction based on taxable income into account. Generally, whatever pre-tax contributions necessary to remain fully eligible for the QBI deduction should be taken.

          However depending on marginal tax rate, once eligible for the maximum QBI deduction, it may make sense to then to make employee after-tax contributions instead of employer contributions and even make Roth deferrals instead of traditional deferrals. This is because self-employed pre-tax contributions reduce QBI and thus the QBI deduction. This is especially true in the second case above. Making employer contributions in the second case above, will lower the overall annual additions.

          While any individual with > $58K in self-employed earned income can make $58K in annual additions to a one-participant 401k, it requires $187.5K in self-employed earned income to make $58K in pre-tax contributions that would be deductible. Give the facts presented, there can not be $116K in deductions.

          Finally, if either of you do any work for the other's business and/or have minor children. You are in a Controlled Group by family attribution and can only adopt, maintain and contribution to a single one-participant 401k. The may not be a bad thing, because if you both want access to employee after-tax contributions. It may be less expensive to do so with a single plan. However, I have no personal knowledge of the pricing for such a one-participant* 401k plan with multiple participants.

          *The IRS' one participant 401k and the marketing terms (solo 401k, individual 401k, etc...), are all misnomers for a 401k plan that can not have non-owner/spouse eligible employees. There certainly can be more than one owner/spouse participants.

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