Contribute to a solo 401k?

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Sources to Fund a Solo 401k - Details in Post

Do invest, get funds from HSA
1
25%
Do invest, get funds from home equity
2
50%
Do invest, get funds from Roth withdrawal
0
No votes
Do invest, get funds from another 401k loan
0
No votes
Do invest, get funds from short term credit card account
0
No votes
No, do not invest in solo 401k, just pay the extra $15,000+ in taxes
1
25%
 
Total votes: 4

Topic Author
KneeDeep
Posts: 2
Joined: Wed Jan 04, 2012 8:42 am

Contribute to a solo 401k?

Post by KneeDeep »

Last year, we added a non-family employee to our business. This employee worked less than half time in 2011. 2011 is the last year we can fund a solo 401k. In theory, we can contribute $35,000-$45,000. The problem is cash flow, or lack thereof. We currently have about 2/3 of our portfolio in 401k-type investments, 1/3 in Roth-type investments and nothing in non-retirement accounts.

Last year, we took out a $50,000 HELOC for home improvements, and used $43,000. We have enough home equity to refi with cash out, but do not want to. Why not? Our current rates on mortgage and HELOC are great, we hate closing fees, and more debt is unwanted. We could also withdraw Roth IRA contributions, or get a 401k loan from another 401k account, or use a Health Savings Account. Or I guess as a last resort we could use credit cards with low rates until we would have cash flow by summer to pay it off.

Our tentative plan is to build up what cash we can in the next three months ($10,000-$20,000), max out the HELOC ($7000), and cash out the Health Savings Account for the rest. We do not like the idea of cashing out Roth-like accounts to put them into future-taxed accounts, but the short term tax bill is big enough that it may make sense?

Again, the urgency with wanting to fund this solo 401k by non-ideal means by April -15 is that 2011 is the last year we can contribute to it. So, a little short-term debt seems acceptable?
cyrn
Posts: 6
Joined: Mon Apr 26, 2010 2:06 pm

Re: Contribute to a solo 401k?

Post by cyrn »

Cashing out your HSA or Roth seems like a poor option to me. You've already paid tax on them and there isn't much room for yearly contributions.

Here are the questions I'd ask myself in your situation:
Are you really 'borrowing' from this year's retirement money to contribute to last year's? If so what are your projected tax brackets this year vs. last and will you be able to max your contributions this year if you contribute to last year's?

Have you considered replacing your solo 401k with a normal one (perhaps with a 2 years full time service requirement to receive company matches)?

Have you already funded your full tax liability for 2011 assuming no 401k contributions? Or will you need to come up with another 15k to pay your taxes if you don't max out the 401k? Your medium-term cash flow problem as stated could be anywhere from 20k [35k contribution - about 15k tax refund on 35k) to 45k (taxes not paid on the 45k contribution).

What did you do for retirement last year (so far), what are you planning for retirement this year, and how long will it take you to recover from your cash flow shortage?
Topic Author
KneeDeep
Posts: 2
Joined: Wed Jan 04, 2012 8:42 am

Re: Contribute to a solo 401k?

Post by KneeDeep »

cyrn wrote:Are you really 'borrowing' from this year's retirement money to contribute to last year's? If so what are your projected tax brackets this year vs. last and will you be able to max your contributions this year if you contribute to last year's?
Federal tax bracket is 33% for both 2011 and 2012. We weren't planning on doing any 401k contributions for 2012, and can't do any Roths.
cyrn wrote:Have you considered replacing your solo 401k with a normal one (perhaps with a 2 years full time service requirement to receive company matches)?
Good idea. Will look into. Can we set up plan to require 5 years full time service? How ridiculous can we make the plan in terms of delaying company match to employees?
cyrn wrote:Have you already funded your full tax liability for 2011 assuming no 401k contributions? Or will you need to come up with another 15k to pay your taxes if you don't max out the 401k? Your medium-term cash flow problem as stated could be anywhere from 20k [35k contribution - about 15k tax refund on 35k) to 45k (taxes not paid on the 45k contribution).
We'll need to either scare up $15,000 for taxes or $X for 401k contributions. If need to pay only taxes, could most likely get this with cash flow.
cyrn wrote:What did you do for retirement last year (so far), what are you planning for retirement this year, and how long will it take you to recover from your cash flow shortage?
No retirement contributions yet in 2011, and $5000 into HSA.
cyrn
Posts: 6
Joined: Mon Apr 26, 2010 2:06 pm

Re: Contribute to a solo 401k?

Post by cyrn »

AFAIK the best you can have 2 years of more than 1000 hours of service requirement for profit sharing eligibility plus 20%/year vesting on the company contributions for a normal 401k (a total of 7 years service before an employee is fully vested). I believe that Employee Fiduciary have been often recommended as a good source for low cost 401k plans by seasoned members of this board.

It sounds like you are running an unincorporated business. If so, then you could file an extension for your taxes which would give you until Oct 15 to come up with the cash for your 401k contribution. Do that and cash flow $5k per month and you'll be at 45k in October without having to draw on your HELOC. How's that sound?
15202guy
Posts: 177
Joined: Mon Jul 18, 2011 8:30 pm

Re: Contribute to a solo 401k?

Post by 15202guy »

Even if you're incorporated, you have until your filing deadline, including extensions, to make the solo 401k contribution.
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