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401k with work and solo 401k- maximum limits?

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  • 401k with work and solo 401k- maximum limits?

    Current employee position- making mid 6 figures salaried-401k. I put in 18,000, and employer puts in 15,900.

    solo 401k (not setup yet)- contractor side gig which pays 1800 a month. So as I understand it I can't put any more "employee contribitions" into my solo 401k since Ive used that all up, but I can put employer(me) contributions in- right?  How much of my 1800/month contractor income can I put in the 401k? I read some 20% figures? Or all of it?

    Also, what about roth solo 401k? Worth it? An option?

    Thanks!

  • #2
    Ok figuring it out more- looks like I need to do some calculations using schedule C and publication 560- but my 'employer' contributions for my solo 401k will be about 4k- sound riight?

     

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    • #3

      1. You will have to calculate your net business profit from Schedule C. This will be income - expenses.

      2. You will have to calculate your SE tax from Schedule SE. Note: You will have already maxed out your SS taxes, because your W-2 Box 5 SS Wages will most certainly be >= SS max wage base, 2017 >= $127,200.

      3. You will have to calculate your maximum employer contribution (net business profit - 1/2 SE tax) from Publication 560, the Deduction Worksheet for Self-Employed.


      Note: You should not use web calculators for determining your one-participant 401k contributions. They do not handle many exception conditions. In your case, they do not properly calculate the SE tax when you have reached the SS max wage base with your primary W-2 employment.

      You should only use professional tax software and/or (Schedules C, SE and the worksheet from Pub 560). In my case, I always do both. Trust, but verify.

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      • #4
        You and spiritrider are correct.  Note that the allowed contribution to either the profit sharing/employer side of the self employed 401K OR a SEP IRA is the same-about 19% of net income (this adjusts for 1/2 of the SE taxes-but use spritrider's instructions) OR 25% of W2 income (but it seems you don't pay yourself as a W2 employee on the side business)

         

        Note that a SE 401k will require an annual tax return once it hits 250K in assets. whereas a SEP IRA never requires follow up paperwork.  If you anticipate making more money with bigger contributions to the side business in the future, a SEP will be easier.

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        • #5
          Whether a Roth 401k is worth it or not depend upon your goals, your tax bracket (which is close to the max), your resources, future conditions, etc. I happen to lean toward a Roth in most cases but doubtful in your tax bracket.

          What might make more sense is an NRAT - Non-Roth After Tax account, allowing you to contribute your remaining profits to an after tax account that you can then r/o to a Roth. The big problem with these accounts is that they require non-prototype plan documents which can be expensive and at least partially negate the benefits. I've just found a provider who charges only a few hundred $$'s a year. If you can find something in that range, I believe it makes the NRAT worthwhile to pursue.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            Johanna is correct. A one-participant plan with a custom plan document allowing employee after-tax contributions would allow you to make such contributions on up to 100% of compensation or the annual limit (2017 = $54K), whichever is lower.

            Only you can determine whether 20% pre-tax contributions or 100% after-tax contributions -> Roth IRA + the administrative costs better advances your goals.

            The administrative costs will be fixed no matter what the amount of compensation. If you expect this additional 1099 income to increase, especially if to >= $54K/year, I would definitely look at this option.

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