solo 401(k) rules

[acb550]

So thanks to Johanna Fox Turner's guides (I think they are very beneficial... here is the link...am I allowed to post this again, it is also in her thread she create? http://foxwealthmgmt.com/for-doctors-only#/doctor-resources and it's posted in this thread:  https://www.whitecoatinvestor.com/forums/topic/new-financial-guides-published/ ) I have been more exposed to the solo 401.  However, I have questions, and I'm not clear looking at the IRS website either:

 

My wife has 2 more years of getting a 1099-Misc (sign-on bonus).  She doesn't have the time to moonlight, so the 1099s will stop after 2017.  Will we be able to contribute every year once it is open?  Or are we only able to contribute the years she gets a 1099?

I see all these rules about max contributions, but what I can't determine is if its total income, or only income reported on the 1099.  She has $20K a year over 4 years as a "forgivable loan".  Because she started in the summer, we actually have 5yrs of 1099s, the first and 5th year reporting less than $20K because of the fractional year.  If we were to open a 401(k) this year, would the max be $5,000 (25%) or would it be 18+ plus 25% up to $53K from all sources of income?

 

Lastly I see they can be Roth or traditional, but there are benefits (such as borrowing against).  The guide mentions using it for backdoor.  Why can't the money just go in and be claimed Roth dollars?  Is there another strategy to use the solo 401(k) to get a multi benefit like HSAs (pre-tax in, tax free growth and deduction when used for medical reasons)?

 

Thank you

[jfoxcpacfp]

acb550,

1. Your wife must have self-employment income in any year she contributes to a SOLO-k.


2. She can contribute "off the top" a total of $18k to all of her retirement plans (401k's, 403b's, etc) per year. If she is contributing nothing at her W2 job, she can contribute $18k to her SOLO-k. If she is contributing $10k at her W2 job, she can contribute $8k. If she is contributing $18k at her W2 job, she is limited to %-contributions in the SOLO-k.
   
   
   
   • Note that the SOLO-k contributions are limited to net income. iow, if the 1099 is for $20k and she writes off $3k of business expenses, the absolute most she can contribute is $17k. If she hires you to do any administrative chores and pays you $1,000, that comes off net profits, lowering the amount she can contribute.
   
   
   
   


3. I'm not sure what you're asking in the last paragraph. Could you please clarify? If you are asking about having a Roth component in your SOLO-k, yes, you can contribute directly to a Roth in your SOLO-k. For more on Roth IRAs, go to Doctor Dilemmas and enter the search term "Roth".

[acb550]

Thanks, Johanna.  It appears that it won't help us (particularly since I know the rules are over all the 401(k)s work and home).

 

That makes the last question irrelevant, but it had to do with this bullet point from your guide:

 

"Look for a way to be paid something by 1099. Even a small amount will allow

you to contribute to a SOLO 401k so you can roll any IRAs or prior 401k’s into it.

The spouse with SE income should hire the other so both will have SOLO-401k’s.

This allows you both to contribute, tax-free, to back-door Roth IRAs."

 

I wasn't sure how the solo 401(k) was used in conjunction with the Roth IRA.  (And I'm still not... an explanation here might help others who can use the solo 401(k) ?)

Thanks

Adam

[jfoxcpacfp]

acb550 wrote:

Thanks, Johanna.  It appears that it won’t help us (particularly since I know the rules are over all the 401(k)s work and home).

 

That makes the last question irrelevant, but it had to do with this bullet point from your guide:

 

“Look for a way to be paid something by 1099. Even a small amount will allow

you to contribute to a SOLO 401k so you can roll any IRAs or prior 401k’s into it.

The spouse with SE income should hire the other so both will have SOLO-401k’s.

This allows you both to contribute, tax-free, to back-door Roth IRAs.”

 

I wasn’t sure how the solo 401(k) was used in conjunction with the Roth IRA.  (And I’m still not… an explanation here might help others who can use the solo 401(k) ?)

Thanks

Adam

Click to expand...

Ahh, now I see. You are planning ahead when you start a SOLO-k. Chances are, one or both spouses will have multiple jobs with multiple opportunities for 401k rollouts in your lifetimes. The options are to: roll out to an IRA, leave behind, or roll into another 401k (or cash out, of course  :x ) If you have money in any kind of IRA, you will pay tax on any back-door Roth IRA contributions. By having a 401k in your control, you don't have to roll into a 401k at your current job, but into your own 401k under your control. Then you can contribute to a back-door Roth IRA, tax free. Maybe I should elaborate in the guide or link to an explanation. Thanks for the suggestion and I'll consider what to do.

[acb550]

I see. Thanks for the clarification

[acb550]

Since we only have two 1099s left (moonlighting isn't in the cards in our situation), and one of those 1099s will be reporting income even though we get none (sign on bonus is a forgivable loan that gets repaid each year that is worked... the first year we got a check but the 1099 was for a partial year... 2017 we'll see the rest of the 1099 but no check), little if any can be contributed.  Would you agree it makes more sense to just contribute to a non-deductible IRA when we can (and we may not for a few years) and then backdoor it each year we contribute?

[jfoxcpacfp]

acb550 wrote:

Since we only have two 1099s left (moonlighting isn’t in the cards in our situation), and one of those 1099s will be reporting income even though we get none (sign on bonus is a forgivable loan that gets repaid each year that is worked… the first year we got a check but the 1099 was for a partial year… 2017 we’ll see the rest of the 1099 but no check), little if any can be contributed.  Would you agree it makes more sense to just contribute to a non-deductible IRA when we can (and we may not for a few years) and then backdoor it each year we contribute?

Click to expand...

I think you should first get your SOLO-k in place while you have the opportunity, particularly since "moonlighting isn't in the cards" for you. That will give you a receptacle should you ever need to roll out a 401k in the future. You are taking advantage of an opportunity rather than building a portfolio - just open a SOLO-k account and put $500 in a market index ETF, leave it in a money market account, whatever.

In addition, you should also be able to fill out your back-door Roths, right?

[acb550]

Thank you

[pilar2100]

jfoxcpacfp wrote:

acb550,

1. Your wife must have self-employment income in any year she contributes to a SOLO-k.


2. She can contribute “off the top” a total of $18k to all of her retirement plans (401k’s, 403b’s, etc) per year. If she is contributing nothing at her W2 job, she can contribute $18k to her SOLO-k. If she is contributing $10k at her W2 job, she can contribute $8k. If she is contributing $18k at her W2 job, she is limited to %-contributions in the SOLO-k.
   
   
   
   • Note that the SOLO-k contributions are limited to net income. iow, if the 1099 is for $20k and she writes off $3k of business expenses, the absolute most she can contribute is $17k. If she hires you to do any administrative chores and pays you $1,000, that comes off net profits, lowering the amount she can contribute.
   
   
   
   


3. I’m not sure what you’re asking in the last paragraph. Could you please clarify? If you are asking about having a Roth component in your SOLO-k, yes, you can contribute directly to a Roth in your SOLO-k. For more on Roth IRAs, go to Doctor Dilemmas and enter the search term “Roth“.

Click to expand...

Hi Johanna,

So one clarification question - in the example you gave above, (20K 1099, 3K in expenses, absolute max contribution 17k) I thought the max contribution would be 25% of the net income or 4250? I'm trying to set up my solo 401k and get paid monthly so won't know how much to contribute until the end of the year (I think). What do you think?

Thanks!

[pilar2100]

Hi Johanna,

So one clarification question - in the example you gave above, (20K 1099, 3K in expenses, absolute max contribution 17k) I thought the max contribution would be 25% of the net income or 4250? I'm trying to set up my solo 401k and get paid monthly so won't know how much to contribute until the end of the year (I think). What do you think?

Thanks!

[acb550]

I think I'll follow your advice and set up the solo 401(k) as a vehicle for the future.  But if I'm going to do that, it actually makes more sense to have one in my name, so I'll probably create two.  It seems all the advisors who speak to the solo 401(k)s (including articles I found at nerdwallet) talk about the pro: you can hire the spouse con: paperwork at 250,000.  However, none talk about a con of paperwork in hiring the spouse.  Are there any forms that need to be filled?  Is everything accounted for come tax season, or are there forms that need to be processed throughout the year?
Thanks

Adam

[jfoxcpacfp]

pilar2100 wrote:

Hi Johanna,

So one clarification question – in the example you gave above, (20K 1099, 3K in expenses, absolute max contribution 17k) I thought the max contribution would be 25% of the net income or 4250? I’m trying to set up my solo 401k and get paid monthly so won’t know how much to contribute until the end of the year (I think). What do you think?

Thanks!

Click to expand...

Hi, pilar2100, "Absolute max" meant the max amount that could be contributed in any situation. This would have meant the spouse was not making employee salary deferrals at main job (I was not privy to her arrangements at her job).

I'm not sure what I think about your question. Are you setting up a SOLO for some moonlighting work and you are paid by primary employer monthly? For your SE work, as long as the SOLO-k is set up by 12/31, you have until the due date for filing your tax return (including extensions) to calculate and deposit your SOLO-k contribution, which will give you plenty of time. You can contribute 20% of net SE income.

[jfoxcpacfp]

acb550 wrote:

I think I’ll follow your advice and set up the solo 401(k) as a vehicle for the future.  But if I’m going to do that, it actually makes more sense to have one in my name, so I’ll probably create two.  It seems all the advisors who speak to the solo 401(k)s (including articles I found at nerdwallet) talk about the pro: you can hire the spouse con: paperwork at 250,000.  However, none talk about a con of paperwork in hiring the spouse.  Are there any forms that need to be filled?  Is everything accounted for come tax season, or are there forms that need to be processed throughout the year?
Thanks

Adam

Click to expand...

acb550 (Adam) - I'm sure I've mentioned the paperwork hassles for hiring a spouse (somewhere, but I'm not going to try to go back and find it :-) ). The filing requirement for a SOLO-k is nothing if plan assets are < $250k and very simple above that threshold. I purposely didn't mention here because the SE income is only a loan arrangement and I wasn't sure you could justify working as an employee. However, the amount of research you do justifies some remuneration, I agree. And, yes, payroll tax filing is a hassle.

You have two options:

• Paycheck in December and file all reports at the end of the year, or


• 1099 income paid to you for research, tax prep, etc. You would file your own sch C and set up a separate SOLO-k. Each of you would have a $250k limit, which is irrelevant given the facts presented. If < $600, she would not be required to give you a 1099, but I would recommend doing so, anyway. It's deductible on her schedule C, taxable on yours. (Technically, if SE profits are < $400, you do not have to pay SE tax, but I wouldn't tempt fate by reducing your wife's Medicare taxable income and not paying under your name.)

[acb550]

Thank you very much!  This is very helpful