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  • Solo 401K with W2 and 1099 income

    Basic question, but need something to show my CPA.

    For 2022, I'll have W2 and 1099 income from two distinct jobs. I'll max out the $20,500 Employee contribution for my 401K with my W2 job and receive about $10,000 in Employer match/profit sharing.

    I'm planning on opening a solo 401K to contribute 20% of my Net adjusted business profits from my 1099 gig as the Employer contribution (keeping all contributions under $61K total.).

    My CPA insists that this cannot be done due to my W2 job. I've sent him the Oblivious Investor calculator, etc. He states that only people who are sole 1099 earners can contribute to a solo 401 K and that having any W2 income and employee contributions from another job makes me ineligible. Is there anything concrete I can show him (other than blogs, etc?)

    Everything else he's done the past couple of years seems accurate so I don't want to start over with a new CPA for this one issue. Please help.
    Last edited by VirginiaMD; 03-17-2022, 02:38 PM.

  • #2
    This article should speak to you and your CPA:

    https://www.whitecoatinvestor.com/multiple-401k-rules/

    Within that there's a link to this from the IRS: https://www.irs.gov/retirement-plans...ibution-limits

    and this:

    https://www.law.cornell.edu/uscode/text/26/415

    Comment


    • #3
      Ask them what is the basis for their claim. Clearly they must know that contributions to multiple 401k plans are allowed as long as you remain within the limits.

      A one-participant 401k plan is a full-fledged 401k with relaxed Form 5500-EZ reporting requirements. Other than that, the tax code is exactly the same.

      Then specifically direct them to examples 1&2 towards the end of the second link.

      Example 1 is directly on point.

      Comment


      • #4
        Thanks so much!

        Comment


        • #5
          You might mention that his tax software will likely calculate the max contribution automatically if he just follows the steps. Then he can provide you with the exact contribution after your return is final.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #6
            I will have around 60K in 1099 income this year.
            I also max out my W2 employer 401k (20500+12500 matching)
            How much can I contribute to solo 401k (Roth)?
            If Roth, are these considered after tax contributions and are the gains tax free?
            anyone have recommendations on a self directed IRA account - I see rocketdollar and broad advertised here? pros and cons? any others ?

            thanks

            Comment


            • #7
              As far as I can tell, you have a few separate questions. The first is about how much you can put in a solo 401k. I recommend you read through the links at the top of the thread. From my limited knowledge, the key is that everything you put in the solo 401k has to be "employer" contributions since you have maxed out your employee contributions for the W2 gig. Someone else may chime in, but I don't think your employer contributions can be Roth so the answer to your question may be 0 roth (see example 2 in WCI post).

              The second question is about a self-directed IRA. Am I correct that this is distinct from the solo 401k you asked about first? Are you looking to make backdoor Roth contributions? If so, unless you are rolling over from a large existing Roth IRA with a regular firm I don't understand why you need it to be self-directed. What are you hoping to invest in that is beyond what you could do in a regular Roth? I think the "best" one hinges almost entirely on what you plan to do with it so people need more detail to give you helpful advice.

              Comment


              • #8
                Originally posted by wonderwoman77 View Post
                I will have around 60K in 1099 income this year.
                I also max out my W2 employer 401k (20500+12500 matching)
                How much can I contribute to solo 401k (Roth)?
                If Roth, are these considered after tax contributions and are the gains tax free?
                anyone have recommendations on a self directed IRA account - I see rocketdollar and broad advertised here? pros and cons? any others ?

                thanks
                If you've maxed out your employEE elective deferral of $20.5K with your W2 employer, you can only make employER contributions to your i401k which are well described in the links posted earlier in this thread. This will be pre-tax, no Roth option. If you truly want to save more Roth $ vs. pre-tax, you could consider using the Mega Backdoor Roth described here: https://www.whitecoatinvestor.com/th...door-roth-ira/
                It requires a customized plan that allows after-tax contributions and will have set-up costs and maintenance fees that the mainstream i401k providers (Fidelity, Schwab, VG, etc.) do not. Finally, why are you interested in a self-directed IRA? Unless you plan on holding non-standard retirement plan assets in the account like crypto, real estate, collectibles, etc., it's not really necessary.

                Comment


                • #9
                  Unless your W-2 employer plan is a 403b. You will have a separate annual addition limit = the lessor of the statutory limit (2022 = $61K) and 100% of compensation.

                  Note: Self-employed employer contributions are not compensation and therefore the employer contribution itself reduces compensation and in this case your annual addition limit.

                  Comment


                  • #10
                    I did not know that... i have a government plan (TSP) for my W2 work ... so I guess I cannot channel any of my 1099 income into retirement account.

                    Do you have to set up a LLC in such a situation and not quire sure if its worth the hassle?

                    the plan was to open a solo 401k and use that in a self directed IRA for real estate investments. I already have backdoor roth with Vanguard and maybe potentially combine all roth ira's if that is even an option.

                    sorry if I am all over the place..

                    Comment


                    • #11
                      Originally posted by wonderwoman77 View Post
                      I did not know that... i have a government plan (TSP) for my W2 work ... so I guess I cannot channel any of my 1099 income into retirement account.

                      Do you have to set up a LLC in such a situation and not quire sure if its worth the hassle?

                      the plan was to open a solo 401k and use that in a self directed IRA for real estate investments. I already have backdoor roth with Vanguard and maybe potentially combine all roth ira's if that is even an option.

                      sorry if I am all over the place..
                      Don’t know what you are referring to whey you say “ did not know that”, there is a lot of info above to choose from. But yes, you can make employer profit sharing contributions based on your 1099 net income (after subtracting 1/2 of related FICA taxes). Whether you use an LLC or work as a sole proprietor makes absolutely no difference.
                      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                      Comment


                      • #12
                        Originally posted by wonderwoman77 View Post

                        the plan was to open a solo 401k and use that in a self directed IRA for real estate investments. I already have backdoor roth with Vanguard and maybe potentially combine all roth ira's if that is even an option.

                        sorry if I am all over the place..
                        No need to apologize, but when your situation and goals are clear it is easier to provide relevant advice. I think we've established that you can make employer contributions for your 1099 income, which would be pre-tax rather than Roth. Maybe I still don't have the full picture, but I recommend that you drop the self-directed IRA idea. Equity real estate is very tax efficient, so there's not much reason to make those investments in an IRA of any kind. Once your Roth is large enough to meet the minimums for a real estate debt fund (often $100-200k) you could consider moving it to a self-directed Roth at that time but your overall portfolio across all accounts should be large enough to stay diversified. I did this myself and have been pleased that I did, but it is hard to back-door into a self-directed account so I have maintained a small Roth at my original brokerage for that.

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