Individual 401k

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forestlake
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Joined: Thu Feb 02, 2012 12:50 pm

Individual 401k

Post by forestlake »

My wife and I own and operate an LLC with no employees that is taxed as a sole proprietorship. My wife and I file jointly (if that matters).

We understand that an Individual 401k is the most advantageous retirement plan for us to use (for example, as opposed to a SEP) because a Solo 401k allows for a higher contribution limit due to the way the contribution is calculated.

We get a Salary Deferral Contribution, which allows 100% of net adjusted business profit up to $17k. Then there's a Profit Sharing Contribution of up to 20% of net adjusted business profits.

My question seems to be a fundamental one, in that, can each my wife and I have our own Individual 401k's or are we limited to one?
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tfb
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Re: Individual 401k

Post by tfb »

forestlake wrote:My question seems to be a fundamental one, in that, can each my wife and I have our own Individual 401k's or are we limited to one?
The plan is set up by the employer. The employer -- the LLC -- can set up multiple 401k plans but usually it's not necessary. A plan can have multiple participants. Each of you will have your own account under the same plan.
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gtaylor
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Re: Individual 401k

Post by gtaylor »

I went around and around a while back on the details for the treatment of spouses in my solo 401(k) situation. I have an unincorporated Sched C business, which for IRS purposes is the same as your LLC. Importantly, this situation is different from formal partnership or other corp entity.

The way I understood it to work for sole prop/LLC where your spouse is involved but not a formal wage earner is as follows:

- There is one Solo 401(k) plan for the biz. One of you is the plan administrator.
- There are sub-accounts, one for you, one for your wife. Each of you is a plan participant.
- Sched C net income is divided according to some suitable method onto two Schedule SEs, one for you, one for your wife.
- The appropriate SE-taxed amount for each person is used for that person's elective salary deferral contribution (say, 100% up to 16500).
- The appropriate SE-taxed amount for each person is used for that person's profit sharing math of 20% minus a smidge for SE tax etc per the worksheet.

The net effect is, and I assume is intended to be, that adding a spouse into the mix does not magically increase the profit sharing space.

If rather than just being married to you and participating in the work and net income, your spouse is paid a formal wage, gets a W2, etc; then you would use that number instead for the elective salary deferral, and then still have to divvy up the net earnings for purposes of making the profit sharing comutation.

Finally, note that in the state of MA, probably among others, SEP/SIMPLE IRA and Individual 401(k) contributions are not deductible on state income tax, so you will need to track your basis until withdrawal time umpteen years in the future.
Topic Author
forestlake
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Joined: Thu Feb 02, 2012 12:50 pm

Re: Individual 401k

Post by forestlake »

What about treating the LLC as a joint venture between husband and wife, then allocate 50% of income and expenses to each spouse.

In effect, this would let the LLC contribute once to each (whereas the individual contributions, combined, would remain the same total as before) and therefore, doubling the total amount of the profit sharing contribution (once to husband, once to wife).

Too, this would increase the "expense" total for the LLC and therefore lower tax.

?
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tfb
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Re: Individual 401k

Post by tfb »

forestlake wrote:What about treating the LLC as a joint venture between husband and wife, then allocate 50% of income and expenses to each spouse.

In effect, this would let the LLC contribute once to each (whereas the individual contributions, combined, would remain the same total as before) and therefore, doubling the total amount of the profit sharing contribution (once to husband, once to wife).

Too, this would increase the "expense" total for the LLC and therefore lower tax.

?
Profit sharing is calculated at the employer level. It doesn't matter how you divide it up among the employees/partners. The total is still the same total.
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PaddyMac
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Re: Individual 401k

Post by PaddyMac »

gtaylor wrote: - There is one Solo 401(k) plan for the biz. One of you is the plan administrator.
- There are sub-accounts, one for you, one for your wife. Each of you is a plan participant.
- Sched C net income is divided according to some suitable method onto two Schedule SEs, one for you, one for your wife.
- The appropriate SE-taxed amount for each person is used for that person's elective salary deferral contribution (say, 100% up to 16500).
- The appropriate SE-taxed amount for each person is used for that person's profit sharing math of 20% minus a smidge for SE tax etc per the worksheet.

The net effect is, and I assume is intended to be, that adding a spouse into the mix does not magically increase the profit sharing space.
This is how our CPA does it as well. We file as sole proprietors as husband and wife. We share 50/50 in the business. The 20% space is based on each spouse's Schedule C so it doesn't double, but you do get the $17K per person.

The confusing bit about the Vanguard Individual 401k plan is that you set up your plan (using one of you as the main contact and the second one as the secondary contact). To make a contribution, you log in as the plan's administrator in the Small Business section of their website, and transfer money from checking and then allocate it as either employer or employee contribution to one or both of the employees.

But in order to see your dividends and how the account is growing (or not!), then you both need to log in separately to your own personal accounts. So you end up with 3 accounts: the plan, yourself, your spouse.
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tfb
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Re: Individual 401k

Post by tfb »

PaddyMac wrote:This is how our CPA does it as well. We file as sole proprietors as husband and wife. We share 50/50 in the business. The 20% space is based on each spouse's Schedule C so it doesn't double, but you do get the $17K per person.
So two Schedule C's, one for each, but at 1/2 of the income and expense of the business? Same EIN on both Schedule C's? gtaylor seems to use one Schedule C but two Schedule SE's.
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ObliviousInvestor
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Re: Individual 401k

Post by ObliviousInvestor »

tfb wrote:
PaddyMac wrote:This is how our CPA does it as well. We file as sole proprietors as husband and wife. We share 50/50 in the business. The 20% space is based on each spouse's Schedule C so it doesn't double, but you do get the $17K per person.
So two Schedule C's, one for each, but at 1/2 of the income and expense of the business? Same EIN on both Schedule C's? gtaylor seems to use one Schedule C but two Schedule SE's.
My understanding is that for husband/wife businesses electing sole proprietorship treatment, two Schedule Cs should be filed.

IRS.gov wrote:Spouses make the election on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s respective interest in the joint venture, and each spouse filing with the Form 1040 a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or Schedule F (Form 1040), Profit of Loss From Farming, Form 4835, Farm Rental Income and Expenses and, if otherwise required, a separate Schedule SE (Form 1040), Self-Employment Tax.
From here: http://www.irs.gov/businesses/small/art ... 76,00.html
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