individual 401k question

[pilar2100]

I'm relatively new to financial planning/investing and really wish I would have known about this site when I was an attending before going back to fellowship...I'm just soaking it all in right now.

Anyways, I am going over my taxes now and realized that my (very small) side job of reviewing insurance claims in paid on a 1099.

Should I set up an individual 401k for this? I anticipate only getting 10-20k/year from this. It's my understanding that I can now deduct anything that would have to do with work for this, right? And then to figure out how much I can put in would depend on how much my employer puts in my 401k through them?

For those who have an individual 401k, do you have it through vanguard?

 

Thank you! This is an amazing resource!

[Zaphod]

Seems like just the right amount to write off. You can go through whoever you like, lots of people here love vanguard.

 

You're the employer in the second scenario as well as the employee. You just need to brush up on the rules, I think WCI has a post about this, and make sure you categorize your contributions correctly to maximize your benefit.

[jfoxcpacfp]

It's too late to set up a 401k for 2015, but you can get around that. Here's what you need to do:

• Set up a SEP IRA for 2015 (you have until 10/15/16) and contribute the max. The rules say 25%, but it's technically less because you have to reduce it by your 1/2 of the Medicare tax + your contribution. Your tax prep software should be able to calculate the max contribution for you.


• Set up a SOLO 401k for 2016. You will not use the SEP going forward as you are changing to the solo-k.


• Roll your SEP into a SOLO 401k.


• For 2016 forward, your direct (employee) contribution will be reduced by your employee contribution at your W2 job. If you max out, then you will still be limited to 25%. The reason to have the 401k, however, is that you will retain the ability to contribute to a Roth via the "back door".

As to deductions, you cannot deduct "...anything that would have to do with work for this...". Expenses that are a result of your W2 job are not deductible on your schedule C for your SE income. However, some expenses, such as licensing and CE, can be prorated.

[litovskyassetmanagement]

pilar2100 wrote:

I’m relatively new to financial planning/investing and really wish I would have known about this site when I was an attending before going back to fellowship…I’m just soaking it all in right now.

Anyways, I am going over my taxes now and realized that my (very small) side job of reviewing insurance claims in paid on a 1099.

Should I set up an individual 401k for this? I anticipate only getting 10-20k/year from this. It’s my understanding that I can now deduct anything that would have to do with work for this, right? And then to figure out how much I can put in would depend on how much my employer puts in my 401k through them?

For those who have an individual 401k, do you have it through vanguard?

 

Thank you! This is an amazing resource!

Click to expand...

Yes, you can deduct certain business expenses, but exactly how you go about doing that is something that your accountant should assist you with as it requires some experience to implement, and making mistakes would not be a good idea.

Your solo 401k contribution is related to your net business profit.  One important point is that if your W2 401k does not have good investments, you might want to make a portion of the salary deferral (up to $18k for both plans) into your solo 401k, and ~20% of your net profit on top of that. Just make sure that between the two 401k plans you have no more than $18k in salary deferral.

Vanguard has a decent solo 401k plan.

[pilar2100]

Is there a maximum that I (+ employer) can put into all 401ks (individual + W2 one)?

[litovskyassetmanagement]

pilar2100 wrote:

Is there a maximum that I (+ employer) can put into all 401ks (individual + W2 one)?

Click to expand...

$53k into each, but $18k in salary deferrals into both.  So if you put $18k into your W2 401k, you can only put ~20% of your net profit into your solo 401k, but this can go as high as $53k if you have the income.

[jfoxcpacfp]

pilar2100 wrote:

Is there a maximum that I (+ employer) can put into all 401ks (individual + W2 one)?

Click to expand...

If you are under age 50, you can defer up to $18k into any combination of 401k's (another $6k if you're over 50). You can bring it up to $53k with the 25% employer contribution. The same limit applies if you have a SEP + work 401k for 2015. Limits are the same for both 2015 and 2016.

 

[mkintx]

The idea of using a solo 401K instead of my employer's 401 (with lousy options) is very appealing.  My husband has a very, very small business, so I have a Keogh spousal account. Even though I don't make money in his business, can I use the Keogh to save instead of my employer's 401K? The logistics sound tricky, but it might make a big financial impact.

[jfoxcpacfp]

I'm sorry but I'm not familiar with a spousal Keogh. Could you please elaborate?

[mkintx]

It is my Profit Sharing Keogh through his business.  I understood it to be the equivalent of a the 401K a spouse can open for a small business.  I don't get paid salary for his business, but support it in non-financial ways.

[jfoxcpacfp]

I suppose what I was confused about was your statement that you don't make any money through his business. Retirement plan contributions are limited by your earned income. Could you clarify?

At the very least, you should be contributing enough to your employer 401k to get the match. Beyond that, it's hard to help without knowledge of the income through your husband's very, very small business and your joint income tax bracket. If you don't plan to stay with this company for the long term, however, it might be a good option to sock away as much as possible, pre-tax, and then roll out to a SOLO 401k (that you hopefully have by then) or your new employer's 401k.

[Sajimone]

I use Vanguard 401k.  Deduct home office, cell phone/internet, office supplies, and business related travel expenses.   With the help of Joanne and Kon... I also started a spousal employee ROTH contribution as well as she didn't have one from her part-time work and she takes care of my travel arrangements as part of my consultancy side-business.   The the maximum 25% contribution is really 20% if you do the math.   This is my understanding of the calculations of what you can potentially contribute... although your self employment tax will depend on how much you've already paid through your W2 and gross income.   Please double check with your accountant...

profit = gross income - expenses

maximum % contribution: 25%

net = profit - SE tax (again this will depend on your total income... whether you paid some SE tax through W2 and also gross income)

net x 0.2 ( 25% / (100 + 25)) = contribution

transfer contribution amount from your business account to vanguard account

Self Employment Tax

15.3% which is 12.4% social security and 2.9% medicare

12.4% applies to the first $117,000 = 14508... which is already paid through my employer

2.9% applies to the whole amount

0.9% is obamacare tax for combined income above $250000

 

[litovskyassetmanagement]

mkintx wrote:

The idea of using a solo 401K instead of my employer’s 401 (with lousy options) is very appealing.  My husband has a very, very small business, so I have a Keogh spousal account. Even though I don’t make money in his business, can I use the Keogh to save instead of my employer’s 401K? The logistics sound tricky, but it might make a big financial impact.

Click to expand...

Who is the custodian?  Nobody offers these plans anymore (neither Vanguard nor Fidelity nor Schwab if I'm not mistaken), and that doesn't leave very many good custodians).  Just use a SEP instead, though a solo 401k would be preferable if you want to do backdoor Roth.

Is yours set up as a defined contribution or a defined benefit?  I believe you still have to have earned income to contribute via a W2.  I don't think there is such a thing as a 'spousal' Keogh, which is what IRAs have when a spouse has no earned income.  I'd have to dig through the IRS regs to find out more.

This is one more reason to avoid Keogh:

http://www.investmentnews.com/article/20090109/FREE/901099997/invalid-keogh-is-a-tax-trap

[mkintx]

Kon Litovsky wrote:

mkintx wrote:

The idea of using a solo 401K instead of my employer’s 401 (with lousy options) is very appealing.  My husband has a very, very small business, so I have a Keogh spousal account. Even though I don’t make money in his business, can I use the Keogh to save instead of my employer’s 401K? The logistics sound tricky, but it might make a big financial impact.

Click to expand…

Who is the custodian?  Nobody offers these plans anymore (neither Vanguard nor Fidelity nor Schwab if I’m not mistaken), and that doesn’t leave very many good custodians).  Just use a SEP instead, though a solo 401k would be preferable if you want to do backdoor Roth.

Is yours set up as a defined contribution or a defined benefit?  I believe you still have to have earned income to contribute via a W2.  I don’t think there is such a thing as a ‘spousal’ Keogh, which is what IRAs have when a spouse has no earned income.  I’d have to dig through the IRS regs to find out more.

This is one more reason to avoid Keogh:

http://www.investmentnews.com/article/20090109/FREE/901099997/invalid-keogh-is-a-tax-trap

Click to expand...

Thanks, it is through Fidelity.  We originally set them up as a place to roll our IRA funds into to eliminate the pro rata for a backdoor IRA.  I haven't contributed to it since, as I already fund a 401k through my employer.

I can't access your link, as it is behind a paywall.

I think I found my answer in another thread, though!  (Thanks, Johanna)

 

[litovskyassetmanagement]

mkintx wrote:

Kon Litovsky wrote:

mkintx wrote:

The idea of using a solo 401K instead of my employer’s 401 (with lousy options) is very appealing.  My husband has a very, very small business, so I have a Keogh spousal account. Even though I don’t make money in his business, can I use the Keogh to save instead of my employer’s 401K? The logistics sound tricky, but it might make a big financial impact.

Click to expand…

Who is the custodian?  Nobody offers these plans anymore (neither Vanguard nor Fidelity nor Schwab if I’m not mistaken), and that doesn’t leave very many good custodians).  Just use a SEP instead, though a solo 401k would be preferable if you want to do backdoor Roth.

Is yours set up as a defined contribution or a defined benefit?  I believe you still have to have earned income to contribute via a W2.  I don’t think there is such a thing as a ‘spousal’ Keogh, which is what IRAs have when a spouse has no earned income.  I’d have to dig through the IRS regs to find out more.

This is one more reason to avoid Keogh:

http://www.investmentnews.com/article/20090109/FREE/901099997/invalid-keogh-is-a-tax-trap

Click to expand…

Thanks, it is through Fidelity.  We originally set them up as a place to roll our IRA funds into to eliminate the pro rata for a backdoor IRA.  I haven’t contributed to it since, as I already fund a 401k through my employer.

I can’t access your link, as it is behind a paywall.

I think I found my answer in another thread, though!  (Thanks, Johanna)

 

Click to expand...

This is all they have for plans:

https://www.fidelity.com/retirement-ira/small-business/compare-plans

No Keogh, unless that was opened a decade or more ago.

Excerpt from the article:
"The Internal Revenue Service believes tens of thousands of small-business owners and sole proprietors may have invalid Keogh plans, and that a failure to fix the problem could prove to be very costly to them and to advisers.

“Under no circumstances should an accountant or a lawyer permit tax deductions for contributions to an illegal Keogh, or allow the Keogh owner’s survivors to do a rollover to an [individual retirement account],” said Seymour Goldberg, an estate lawyer and pension expert in the Jericho, N.Y., firm of Goldberg & Goldberg PC. “This is a malpractice issue, he said.”

WHEN A KEOGH EXPIRES

Keoghs become invalid when the plan documents aren’t amended to reflect periodic changes in federal law. This happens far more often than plan owners or their advisers realize, Mr. Goldberg said. When a Keogh is invalid, contributions and earnings become taxable, and plan rollovers into IRAs become illegal."