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Solo 401k Minimum Salary

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  • Solo 401k Minimum Salary


    I had a quick question regarding the solo 401k.

    I am currently set up as an S-corp. My corporation (John Doe Inc) pays myself (John Doe) a salary. My 2015 K1 shows an income of approximately $400,000. My personal W2 (paid to myself from my corporation) shows wages of $127,000.


    Are these numbers sufficient in order to have maxed out the full $53,000 for the solo 401k. I recall that you need a minimum of $180,000 in order to max out. I am just confused if this $180,000 has to be in reference to my K1 amount or my W2 amount.

    I appreciate your help.

  • #2
    The 25% is calculated on your earned income, not the remaining corporate income. Your corporation can contribute 25% of your pay on your behalf, or $31,750. This is in addition to your $18k employee contribution, total of $49,750. Not quite the maximum, but close.

    fwiw, you are playing with fire to operate as a solo owner of an s-corp with $527k of taxable income and showing earned income of only $127k. This is not simply an opinion.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Thank you for the reply. I appreciate it.

      So, if my W2 salary from my S-corp was $140k, would I then be able make the max contribution? 25% of 140k would be 35k . This plus the 18k from my employee contribution would make a total of 53k. I guess I am just confused because I've read before that one needs a minimum of 180k to make the max contribution and I'm not sure from where that 180k number came.

      Next, you mentioned that my S-corp income is 527k. The total that is listed on my K1 is 400k. Why did you add the 400k and the 127k for a total of 527k, when the most I made was 400k? The 127k is paid from 400k pot.

      Finally, I understand your concern regarding the figure of only 127k. I will ask my accountant to increase the number to a more reasonable one.

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      • #4
        I said your taxable income is $527k, not your s-corp income. The reason is that you wrote your W2 shows $127k and your K1 shows $400k, which totals $527k. K1 profits are calculated net of your salary.

        You are correct that you need to make $140k to max out your 401k. 25% of $140k is $35k + employee deferral of $18k = $53k. If you are age 50+, you can contribute an extra $6k. This simple calculator is a quick way to figure results.

        Have you considered adding a defined benefits plan to save more tax-deferred dollars?

        Sorry, can't help with where you read about the $180k. Maybe it was an example for another type of plan?
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          Thanks again for the reply. It was very helpful.

          I've spoken to people about a dbp, but most people say that since I'm less than 35, it's best to hold off for now.

          Out of curiosity, what do you think is a reasonable wage to put on my w2 to avoid any red flags?

          Thanks

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          • #6


            Out of curiosity, what do you think is a reasonable wage to put on my w2 to avoid any red flags?
            Click to expand...


            Historically, the IRS has allowed a 1:1 ratio of income to distributions. Even more important, however, than this generic estimate is your value to the business. Would the business still consider to produce distributable net income of $400k without you?

            You should pay yourself a fair market salary - what you would be paid in an arm's length transaction for your specialty in your region. If you have employees whose value adds to your bottom line, that would lend credibility to the argument that you are not the sole driver of income. Given that you have a SOLO-k, that is obviously not the case. Of course, this is a conversation your CPA should be having with you.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #7
              Perfect. Thanks so much for your help.

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