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solo 401k questions - set up for spouse? 401k loans?

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  • solo 401k questions - set up for spouse? 401k loans?

    I met with financial advisor today (was a free consultation).  He had some interesting 401k ideas and I wanted to get some thoughts from this group.  For context, I’m an independently employed (sole proprietor) emergency physician and max out my solo 401k (and HSA) yearly for retirement/tax savings.  My wife takes care of our kids.

    1) He recommended I employee my wife to do the books and pay her $20k yearly.  Then contribute this money to her own 401k.  Main advantage would be to decrease our overall tax burden and increase our retirement savings at a small cost of additional FICA taxes for the $20k (but overall a win given my 40+% marginal tax rate).  WCI did a post on this and I like the idea.  Any reason not to do this? Any idea how to set up a payroll system?

    2) I have a 50k partner buy in two years from now. Right now, I’m putting the money (2k/month) in a taxed Betterment account with a target 2 year spending goal.  My original plan was to save the money in a high yield money market and just leave it alone but I wanted to try out Betterment.  He recommended I save the money in a 401k for the next two years then take a 401k loan to pay the partner buy in.  I can deduct the buy in from my paycheck so I won’t get taxed on it.  I basically would need the money I save over the next two years to pay myself during the time my paycheck is deducted.  Advantages would be that I’m using all pretax money at my highest marginal tax rate.  Disadvantage is that I’m doing a 401k loan which seems to be frowned upon in self-investment circles.  I would be able to pay back the loan in well under a year.  Thoughts?

    3) Along the same lines as #2, he recommended I stop contributing to my 529 and use my 401k as a kid’s college fund.  This would need to be in the form of a loan since I don’t have any IRA funds.  Seems a bit riskier since I still have to pay the money back.  I also plan to be maxing out my pre tax retirement savings for my retirement.  Has anyone heard of this?

    Thanks in advance!

  • #2
    The FA displays a fundamental lack of understanding about taxation.

    1. If you employ your wife, all you are doing is routing some of your taxable income to her, at the same marginal tax rate. iow, the $20k will reduce your taxable income and increase hers, and will be taxed at your joint marginal tax bracket regardless of who it is attributed to. You could get around this by filing separately (MFS). Because of the "tax penalties" applied to MFS spouses, it is highly unlikely you will have a net positive on your tax bill. So, if you take his advice, you will merely exchange $20k of income taxed at 2.9% to $20k of income taxed at 15.3%.  Even if you want to build retirement savings for your wife, I just don't think it's worth it b/c of the extra you would have to earn on her 401k to overcome the up-front SS cost. Of course, you may also want to build a SS account for her, but still a costly way to do it. If it helps to know, none of our current physician business owner clients employ this strategy. If you are talking about this post by WCI, scroll down to Additional Payroll Taxes.

    2. You cannot deduct the purchase of your partnership shares, no matter how you pay for it. If via tax withholding, it will be an after-tax transaction. I strongly recommend that you don't invest savings for a partnership buy-in at any time within the next 5 years but, instead, continue with your current strategy of saving in a HYMM account.

    3. No, I have not heard of this because it is a ridiculous idea. You can borrow a maximum of $50k from your 401k, anyway, hardly enough for 4 years of tuition. You would also be foregoing any state tuition savings tax breaks afforded to you.

    Are you sure you recommended all of the above? If so, it scares me to think this guy is being paid for advice.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087