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  • Solo 401K + Regular 401k implications

    I have a question about the tax implications for dual 401k accounts. My situation is such that the majority of my income is W2 and a small part (say 50K) is through 1099.

    I have a 401K through my employer and am planning to set up a solo 401K for my 1099 income.

    One option would be to continue to max out 18K in my regular 401K (my employer doesn't match anything) which leaves me room to contribute 20% of 50K into my solo 401k (so 10K).

    A second option would be to stop contributing anything to my regular 401K which would allow me to contribute 18K + 20% of the 1099 income (10K) to my solo 401k

    Total contributions to tax deferred accounts in either choice would be the same however it seems that it would be advantageous to pick the latter option just because it reduces 1099 income which would mean I pay self employment tax on a lower amount so I'll save a bit of money there. Is this correct? Any other implications I am missing?

     

    Also the self employment tax, as I understand it, is social security and medicare, however with the situation above I will clearly max out my social security contributions with my W2 income so does that mean that I do not have to pay any more social security tax on my 1099 income and so the self employment tax will only be the 2.9% or whatever it is for medicare?

  • #2
    I am really sorry to break this to you, but 401k contributions reduce income tax only, not FICA tax. It is an "adjustment" to gross income on page 1 of your form 1040, not a direct reduction of schedule C income. No, it doesn't seem fair, but that's the deal, whether you are an employee or an IC. The only FICA tax break for benefits that I know of is for HSA contributions.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3




      I am really sorry to break this to you, but 401k contributions reduce income tax only, not FICA tax. It is an “adjustment” to gross income on page 1 of your form 1040, not a direct reduction of schedule C income. No, it doesn’t seem fair, but that’s the deal, whether you are an employee or an IC. The only FICA tax break for benefits that I know of is for HSA contributions.
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