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  • Retirement contribution options

    My wife is employed by a large corporation has a 401k there which contributes 18k.  She is also starting LLC schedule C selling solar power, highly beneficial tax credits.  Looks like LLC will be resulting in income of about 100k this year and subsequently as we increase investment that will increase annually.  What are her options for retirement accounts in regard to her LLC.  we are in the top tax bracket, however I will be using tax credits to eliminate most of my tax liability.

  • #2
    Will she have earned income from the LLC or will it all be passive?
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      LLC will be actively managed she is running the solar business, so it appears it is not passive income, appears it will be active income

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      • #4
        https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview

        She as the employer appears to be able to make employer contributions up to a total of $53,000/yr (not to exceed her compensation). This includes maximum elective deferral of $18,000/yr for all total 401k/403b accounts (not each), so if she maxes her employer's 401k at $18,000, she can add $35,000 to her self-employed 401k (or her business's income, if less).

        If you want her business to "employ" you (which might be iffy, Idk, seems that way to me), she could do the same for you up to $53,000/yr (total $106,000/yr for all 401/403 for the both of you). I'd run that idea by a professional, first...

        I was going to do this with my wife's side job after her $18k in 403b, my $18k in TSP, and $5.5k/ea in IRAs, but she only made a few thousand from it before quitting and it wasn't really worth it for us at the time. Self-employed 401k accounts are pretty easy to set up, though I never ended up having to file the tax paperwork for it so I can't share that experience.

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        • #5
          thanks for the info DMFA, so she can set aside 35k, I own my own practice, so having me employed by this entity wouldn't allow me to contribute additional funds i believe as i max out my account currently

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          • #6
            Can she not do 53k for her individual 401k, she has 18,000 going in as employee portion to her w2 job. Example 2 from WCI rules for having multiple 401k suggests that you could do 53k

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            • #7
              She can put 53k into her solo 401k from the employer portion HOWEVER it is limited by total income. It ends up being ~20% of self-employment income...see here for more information: https://www.irs.gov/retirement-plans/one-participant-401-k-plans

              Check out the calculator on this page...it breaks down the different options. http://solo401k.bcmadvisors.com/calculator.html

              The "Maximum Individual 401k Contribution" MINUS $18,000 is what she could contribute to her solo 401k if she's contributing the full amount to the employee portion in the 401k at the large corporation you described.

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              • #8
                Sorry if I made duplicate posts - mobile rendering is acting funny

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                • #9
                  I tried to type this like 3 times from my phone, but it wouldn't post and flagged me for duplicates...

                  ...but I did indeed trip myself up (thank you for correcting me), and you should be able to exceed the usual $53k limit between add'l 401k accounts, my personal experience in the matter was done with a 403b and they have (very slightly) different rules regarding contributions other than elective deferrals.

                  WCI spells this out here https://www.whitecoatinvestor.com/multiple-401k-rules/

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                  • #10




                    My wife is employed by a large corporation has a 401k there which contributes 18k.  She is also starting LLC schedule C selling solar power, highly beneficial tax credits.  Looks like LLC will be resulting in income of about 100k this year and subsequently as we increase investment that will increase annually.  What are her options for retirement accounts in regard to her LLC.  we are in the top tax bracket, however I will be using tax credits to eliminate most of my tax liability.
                    Click to expand...


                    Ok, based on the exchange above, there are several issues here.  Your wife can indeed contribute $53k into her solo 401k, but all of it has to come from the ~20% profit sharing.  That said, she can contribute 20% of the $100k income AND she can contribute UP TO $53k in after-tax income, which can be converted to Roth. So that's allowed.

                    EDIT: If the plan at work is not that great, she can also put the entire $53k into her plan (again, salary deferral + profit sharing + after-tax).

                    I don't think WCI had enough details in the 'multiple 401k rules' thread - I believe I may have posted something regarding the marriage attribution on that thread, but here it is in a nutshell. If you own 80% or more of your practice and if you have any children or if you live in a community property state, there are other issues at play here, namely controlled/affiliated groups.  There is spousal attribution through marriage via children, so that creates a controlled group.  Living in a community property state also creates a controlled group via direct spousal attribution.  What does this mean?  Any businesses that your wife owns are now aggregated with your practice for the purpose of having a retirement plan.  Thus, this might be a much bigger issue to consider.  While you can have separate plans in that case, they have to be tested together, which becomes a big burden.  So basically you would end up with a single plan that covers multiple employers.  That's not necessarily a bad thing though because then your wife can still contribute via profit sharing and after-tax contributions, but it does make things a bit more complex because it would involve making changes to your current plan.
                    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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                    • #11
                      Thanks Kon, I don't live in a community property state and I own 50% of my practice.  A few more questions for you Kon.  I'm very interested in how you go about setting up after-tax contribution portion and converting to roth?  Can you just convert that portion or do you convert entire balance.  If you convert entire balance would it make more sense to just do entire contribution as after tax?  She contributes 18k to her job's 401k, can she still do after tax amount of 53k?

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                      • #12




                        Thanks Kon, I don’t live in a community property state and I own 50% of my practice.  A few more questions for you Kon.  I’m very interested in how you go about setting up after-tax contribution portion and converting to roth?  Can you just convert that portion or do you convert entire balance.  If you convert entire balance would it make more sense to just do entire contribution as after tax?  She contributes 18k to her job’s 401k, can she still do after tax amount of 53k?
                        Click to expand...


                        So basically, this is not a controlled group.  You are in luck, but you always have to check.

                        This is the way I usually do it if we want to have a lot more flexibility with the solo 401k plan:

                        https://www.whitecoatinvestor.com/improving-the-vanguard-individual-401k-with-a-customized-plan/

                        For now, it is not possible to convert the after-tax inside the account, so you'd need to roll this over into a Roth IRA (not a big deal as you only have to do it once a year), but I expect this to change in the near future.  In short, you'll need a custom plan doc. to allow this stuff.  You can also convert part of your tax-deferred contribution to Roth right inside the plan without having to do rollovers.  You can convert any amount you'd like.  However, with after-tax contributions, you might as well convert the whole thing.

                        Yes, if you are in a position to benefit from a big Roth contribution, you might as well do all after-tax, but considering that you have a practice, your wife has a W2 job AND she has a business on the side, I'm guessing you might be in the high tax brackets, so it probably would be more advantageous for you to do mostly tax-deferred contributions (with the backdoor Roth as another option).  Without looking at your finances in more detail it is difficult to say which way would be best.
                        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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