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Solo 401k

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  • Solo 401k

    I've read through the forums and didn't come across a clear answer for my situation.

    I'm a newly minted physician. I will be paid 100% as a 1099. My earnings will be ~400k eventually up to 600k. I have setup an LLC filing as an S-corp. I plan on paying myself a salary of ~200k/yr through payroll. I have a non-working spouse. I want to open a solo 401k for the both of us. I plan on hiring my spouse as a business manager, with the goal of jointly putting 108k/yr in the solo 401k.

    For my side I was planning on a 18k employee contribution and 36k employer contribution to the solo 401k.

    What is the best way to set it up on my spouses side? Can I pay them 18k/yr, then put 100% of her salary towards their 401k and do a 36k employer contribution as well?

    Thank you for your input.

  • #2
    There are two contribution limits to a 401k. There is an employee deferral limit across all qualified plans. For 2017 = $18K and for 2018 = $18.5K. The maximum employer contribution for a W-2 employee is 25% of compensation.

    There is an additional annual addition limit of all employee + employer contributions. This is the lower of 100% of compensation or a fixed dollar limit. The fixed dollar limit for 2017 = $54K and for 2018 = $55K.

    In 2017, you would have to pay yourself at least $144K to reach the $54K limit. $18K employee deferral + $36K ($144K * 25%) employer contribution = $54K

    In 2017, you would need to pay her at least $24K to contribute 100% of compensation. This would be an $18K employee deferral + $6K ($24K * 25%) employer contribution = $24K. Like above you would have to pay her $144K to reach $54K with just employee deferrals + employer contributions.

    There is another way to reach $54K in contributions on just $54K in compensation, if you were to get a custom one-participant 401k through a TPA that offered after-tax contributions.

    In 2017, you would need to pay her $54K to contribute the full annual addition limit. This would be an $18K employee deferral + $13.5K employer contribution + 22.5K after-tax contribution. You would then rollover the after-tax contributions to a Roth IRA.

    Of course, you would have to justify the $24K, $54K or $144K in Fair Market Value (FMV) wages and actual work hours. It might be possible to justify the $24K, but certainly would be a stretch to justify $54K let alone $144K. Exactly how much administrative work is necessary for supporting someone who is just providing professional services to a single client?


    • #3
      Spiritrider, thank you for your reply this really cleared things up for me!


      • #4
        As always, spiritrider has provided a very clear and concise explanation of the rules. Understood from your original post that you had been hoping to limit pay for your wife to $18k, which could be quite reasonable for basic services but will not help you reach your goal of maximizing contributions to her 401k. As business manager at your salary level, support services could include marketing, web design, payroll, bookkeeping, scheduling, coding and billing, etc. - or it could simply include payroll and bookkeeping. The higher the level of service and/or time spent, especially should your spouse have a medical background and can be especially useful in consulting, the greater the "reasonable compensation".

        I also wish to clarify the tax effect of hiring your spouse, because sometimes this aspect is not considered by the business owner:

        • You will not save any income taxes as your 2 incomes will be combined and taxed at your joint tax bracket.

        • If your spouse is not already working and maxing out FICA taxes, then you will have an extra tax burden of 12.2% SS taxes on the first $127,200 ($130,500 in 2018) of her pay. That is because you will have already maxed out your SS on the first $127,200 ($130,500) of your income and your spouse will have to start all over again.

          • For some, the additional 12.2% owed before even investing the $$ is enough to simply invest the amount you would contribute to spouse's 401k account in a taxable account.

          • In your situation, if you'll be able to set up the NRAT (Non Roth After Tax) contributory account, I would lean toward the spousal 401k - the boost to Roth savings tips it over the edge for me.

          • You'll need to consider the additional cost of hiring a TPA for the setup fee and annual paperwork, though. Ask your CPA or CFP for a referral to a reasonably-priced provider.

        • If you are not already working with an experienced CPA, I strongly suggest you find one.

        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087