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  • #1

    Solo 401k question

    I am still trying to wrap my head around the solo 401k.  I am currently a partner in my practice where I earn a base of $425k.  I also have about 30k in 1099 income from a side job.  I contribute the max to our companies 401k plan.  I also have a SEP but I was going to open a solo 401k and roll the SEP into that so that I can participate in a back door Roth IRA every year.  Can I put any additional money into my solo 401k plan as an employer contribution on top of what I already contribute to me companies 401k?  If so, how much?

     

     
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  • #2
    Yes, you can put additional employer contribution in.  See IRS statement below.  If you have maxed employee contribution at your company, you cannot add more of it.

    https://www.irs.gov/retirement-plans/one-participant-401k-plans

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    • #3
      How do they distinguish between employer and employee contributions if you are both in a sole-proprietorship?

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      • #4

        MDTide wrote:



        How do they distinguish between employer and employee contributions if you are both in a sole-proprietorship?
        Click to expand...


        You are both.  But, you can only have 18K in employee contributions across all 401k accounts.  So, if you maxed that at your other job you are done with employee contributions.  When I make contributions to my solo 401k at Schwab, I have to declare if they are employee or employer contributions.  In your case, they would be employer only.

        Basic idea for your 30K of 1099 income:

        1.  Subtract out any business expenses.  Take advantage of any you get.  The rest is your profit.

        2.  With your profit, subtract any social security owed.  Then you can put an employer contribution of 20% of the remainder.

        If you are lucky, spiritrider will come along.  S/he usually explains it best.  WCI may have a post on it. Good luck!

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        • #5
          My accountant is telling me that I can't make a contribution to my solo 401k if I max out my employers 401k.  It may be time to find another accountant.

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          • #6
            Since you contributed to your SEP with pretax money, you'd have to pay taxes on the conversion to get it into a backdoor Roth (can't fund with pretax funds).  Maybe it's still the right move depending on your current vs retirement situation, just be aware.

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            • #7

              MDTide wrote:



              My accountant is telling me that I can’t make a contribution to my solo 401k if I max out my employers 401k.  It may be time to find another accountant.
              Click to expand...


              Sorry, but your accountant has confused employer and employee contributions. Dr. Mom told you what you need to do.

              AnotherSecondOpinion wrote:



              Since you contributed to your SEP with pretax money, you’d have to pay taxes on the conversion to get it into a backdoor Roth (can’t fund with pretax funds).  Maybe it’s still the right move depending on your current vs retirement situation, just be aware.
              Click to expand...


              All the OP wants to do is roll the SEP into the SOLO-k and there will be no taxes due. Then s/he can do the backdoor Roth. OP, need to make sure your accountant knows how to do this properly, too.
              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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              • #8

                MDTide wrote:



                I am still trying to wrap my head around the solo 401k.  I am currently a partner in my practice where I earn a base of $425k.  I also have about 30k in 1099 income from a side job.  I contribute the max to our companies 401k plan.  I also have a SEP but I was going to open a solo 401k and roll the SEP into that so that I can participate in a back door Roth IRA every year.  Can I put any additional money into my solo 401k plan as an employer contribution on top of what I already contribute to me companies 401k?  If so, how much?

                 

                 
                Click to expand...


                What is your partnership % in your practice?  How old are you?  Does your partnership have any non-spouse employees? As others have said, you should be able to open a solo 401k for side income and roll your SEP into it, and definitely consult your CPA when it comes to calculating your contribution into the solo 401k.  Another thing that can be done is hiring a spouse and that would allow you to make additional contributions on her behalf.

                However, if your partnership ownership percentage is 51% or more, then you can't open a solo 401k for side income IF you have non-spouse employees in the partnership (due to a controlled group situation), so this is one thing to watch out for.
                Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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                • #9
                  I am 38 and own 12% of the practice.  Our partnership does have non-spouse employees.  If my spouse already has a job, can I still hire her?

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                  • #10

                    MDTide wrote:



                    I am 38 and own 12% of the practice.  Our partnership does have non-spouse employees.  If my spouse already has a job, can I still hire her?
                    Click to expand...


                    You can hire her provided there is a valid job description and the other partners agree to it.  If she has a retirement plan available elsewhere you will need to coordinate contributions. If you have at least several other partners and you want to contribute more to tax-deferred accounts, your practice might consider adding a Cash Balance plan, provided that enough partners want to take advantage of it and your practice demographics is favorable.  You can also do the solo 401k plan for the side income.
                    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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                    • #11
                      One caveat You mentioned that you already have a SEP IRA. Have you already made contributions for this tax year?

                      If so, you can not have a 5305-SEP and a one-participant 401k in the same year. You must use a prototype or Individually designed plan.

                      SEP-IRA plans at the majority of mainstream providers (Vanguard, Fidelity, TD, etc..) are 5305-SEP plans. However, Schwab and Merrill Lynch have prototype SEP IRA plans.

                      If you made contributions for this tax year to a 5305-SEP, let us know. There is a rather covoluted work around.

                      When you are looking for a one-participant 401k, make sure they accept incoming rollovers. Vangurd does not.

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                      • #12
                        Here's the calculation for how much you can contribute to a Solo 401k for the employer contribution:

                         

                        Maximum employer contribution to Solo 401k = (Net business income - 1/2 of Self Employment Tax) x 0.2

                         

                        Self employment tax = Net business income x 0.9253 x 0.029

                         

                        [edit] If you want to do the calculation in one step, the math comes out to:

                        Max employer contribution to Solo 401k = Net business income x 0.19731663

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