Solo 401 K questions

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Topic Author
andyandyandy
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Solo 401 K questions

Post by andyandyandy »

I am about to open Solo 401K. Me and my wife are salaried with our LLC but also expect some profit after year end. I would appreciate some clarifications:


So at this time can I just contribute the salary deferral portion for me and my wife (17,500)? and contribute to profit part later once I know the profit?

I am assuming salary portion payment to solo 401K goes from personal account and profit portion from business account, correct?

Does it matter if our traditional IRA accounts stay with VG and solo 401k with Fidelity?

Can I open a Roth IRA along with solo 401K? I guess upper limit for joint filing is 188K, but in my arrangement (Salary+Profit) I could be close to 188K or below. So can I open Roth later or what should be the best practice?

Appreciate your input!
Andy
DSInvestor
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Re: Solo 401 K questions

Post by DSInvestor »

Both the employee and employer contributions to Solo 401k are made from the business account.

If your company pays you a W-2 salary, you likely have payroll setup to withhold Fed/State income tax, social security, medicare etc. Those withholdings are taken from your paycheck and the company pays them from the company account at a later date. The Solo 401k employee salary deferral contribution would be another deduction from your paycheck and the company pays it to the 401k custodian. This way, the payroll system knows what 401k contributions you made and can generate an appropriate W-2 for you both at year end. For example, W-2 box 1 will be reduced by your Traditional employee salary deferral contributions. The retirement plan box will be checked with retirement plan codes applicable to your contributions.

The employer profit share contribution is a percentage of your W-2 salary (not a percentage of company profit) and is paid by the company. The company must have the cash available to make the employer contribution.

You can have your IRAs at any custodian. I have my Solo 401k at Fidelity, a Roth IRA at Fidelity, Roth IRA and taxable accounts at Vanguard.

IRA contributions are allowed above and beyond your Solo 401k contributions. The large tax deductions offered by Solo 401k will help both of you stay under the MAGI limits for Roth IRA contributions. For 2014, full contribution to Roth IRA is allowed if MAGI is under 181K. Reduced contribution if MAGI is between 181 and 191K. No contribution allowed if MAGI greater than 191K. If you think you'll be close to the MAGI limits to disallow Roth IRA contributions you can:

a) Hold off on Roth IRA contributions until you know you're eligible and then make your max 2014 contributions before April 15, 2015 deadline. Note that your max may be below the $5500 max if your MAGI falls inside the phase out range.

b) Avoid the MAGI limits by contributing to Traditional IRA instead and converting to Roth IRA. This is known as the backdoor into Roth IRA. This may not be a great idea if you have pre-tax IRA assets in Traditional IRA, Rollover IRA, SEP-IRA, SIMPLE-IRA that you don't want to rollover into 401k. Your Fidelity Solo 401k will accept inbound rollover from IRAs and has lots of low cost index fund options. Be aware that once solo 401k plan assets exceed 250K, annual filings of form 5500EZ will be required.

Give the Fidelity small business retirement group a call and ask lots of questions. I think you will find them really helpful.
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Topic Author
andyandyandy
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Re: Solo 401 K questions

Post by andyandyandy »

Thanks a lot!
DSInvestor
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Re: Solo 401 K questions

Post by DSInvestor »

IRS page showing 2014 MAGI limits for Roth IRA contributions:
http://www.irs.gov/Retirement-Plans/Pla ... e-for-2014

If you're interested in using the backdoor into Roth IRA, make sure that you're familiar with IRS Form 8606 which is used to:

a) Track non-deductible contributions (IRA basis) and

b) Calculate the taxable and non-taxable amounts of Roth conversions. Notice that line 6 of form 8606 asks for IRA balances as of Dec 31. That will be used to prorate IRA basis for partial conversions - an issue if you you have non-Roth IRA asset balances on Dec 31.
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andyandyandy
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Re: Solo 401 K questions

Post by andyandyandy »

DSInvestor wrote:Both the employee and employer contributions to Solo 401k are made from the business account.

If your company pays you a W-2 salary, you likely have payroll setup to withhold Fed/State income tax, social security, medicare etc. Those withholdings are taken from your paycheck and the company pays them from the company account at a later date. The Solo 401k employee salary deferral contribution would be another deduction from your paycheck and the company pays it to the 401k custodian. This way, the payroll system knows what 401k contributions you made and can generate an appropriate W-2 for you both at year end. For example, W-2 box 1 will be reduced by your Traditional employee salary deferral contributions. The retirement plan box will be checked with retirement plan codes applicable to your contributions.
-As half year has already passed, and I still want to make full contributions , will payroll system adjust to that? Also my wife's salary is about 25K, mine 60K(We will have left profits after that)? Or should we consider raising her salary?
- Can these contributions be automated ( I think Fidelity does not)

Thanks for the valuable input!
DSInvestor
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Re: Solo 401 K questions

Post by DSInvestor »

andyandyandy wrote:-As half year has already passed, and I still want to make full contributions , will payroll system adjust to that? Also my wife's salary is about 25K, mine 60K(We will have left profits after that)? Or should we consider raising her salary?
- Can these contributions be automated ( I think Fidelity does not)
When self employed, you have complete control over the payroll system. You can control whether to issue paychecks weekly, bi-weekly, monthly, quarterly, or even annually. You can set frequency of pay, how much to deduct for Fed tax, state tax, Employee solo 401k contribution etc. I paid myself annually to minimize the work of payroll, withholding taxes, making tax deposits, 401k contributions etc. My Solo 401k contributions were made over the phone with a Fidelity rep who took the money out of my fidelity business account.

If her annual salary is 25K and she has already been paid 12.5K there will not be sufficient income to withhold 17.5K in Solo 401k employee salary deferral contributions for 2014. You may need set her salary for the remainder of the year at a level that will support 17.5K contribution plus social security and medicare and other withholdings. Maybe have the company pay her 20K from July through Dec.

You have 60K salary. If you've already paid yourself 30K for the year, your remaining salary of 30K will be sufficient to support 17.5K employee contribution to Solo 401k.

Hopefully you have ample cash reserves as your paychecks will be close to zero for the rest of the year.

Employer contributions are set at 0-25% of the gross salary. The employer profit share contributions are not withheld from the paychecks. On 60K salary, your employer profit share could be as high as 25% or 15K. If your employer profit share is set for 25% for you, then your wife's profit share must also be 25% of her salary.

QUESTION: Did you or your wife contribute to another 401k/403b/SIMPLE-IRA plan in 2014? If yes, those contributions may affect how much you can contribute as employee salary deferral to your solo 401k.
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Re: Solo 401 K questions

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (Solo 401(k)).

Also see: Solo 401(k) plan
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Topic Author
andyandyandy
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Re: Solo 401 K questions

Post by andyandyandy »

DSInvestor wrote:
QUESTION: Did you or your wife contribute to another 401k/403b/SIMPLE-IRA plan in 2014? If yes, those contributions may affect how much you can contribute as employee salary deferral to your solo 401k.
Thanks! No other 401Ks, IRS etc.

I have sufficient funds and can survive on 0 payroll for rest of the year.
I want to maximize my 52K+52K contribution for this year. What should be my strategy for rest of the year to open solo 401K?

Another thing: I am actively looking for home(Have funds for down payments) so not sure if lender sees my payroll for 0$, will it be an adverse impact?
I think I am very close to deciding about home. Will it make sense to let payroll continue and once home part is done then bup up salary for both of us and reach the targte of 104 K?

Again I am very thankful for wonderful info from this forum.
mah001
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Re: Solo 401 K questions

Post by mah001 »

In order to contribute a total of $104K, you need either to open a defined benefit plan or pay at least $276K total salary for you + your wife together. Check: $276K @25% maximum = $69,000................plus $35,000 elective deferrals equals $104,000.
DSInvestor
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Re: Solo 401 K questions

Post by DSInvestor »

andyandyandy wrote:I want to maximize my 52K+52K contribution for this year. What should be my strategy for rest of the year to open solo 401K?
In order to contribute 52K to Solo 401k, your salaries need to be much higher than 25K and 60K. The employee salary deferral is 17.5K and that's easy because it can be up to 100% of salary. The employer profit share is up to 25% of W-2 salary. If you max out employee salary deferral for 17.5K, that implies 34.5K of employer profit share contributions. The minimum salary required to support 34.5K of employer profit share assuming max 25% is 138K. That's minimum of 138K salary for each of you.

Don't forget to factor in the extra cash required to cover the extra employee and employer sides social security and medicare.
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pshonore
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Re: Solo 401 K questions

Post by pshonore »

Just so we're all on the same page, can you confirm that your business is taxed as an S-Corp? The fact you're "on salary" suggests that, but it never hurts to ask the question. There is a lot of misunderstandings relative to LLCs
Topic Author
andyandyandy
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Re: Solo 401 K questions

Post by andyandyandy »

Thanks All!
Yes its LLC with S Corp treatment
Topic Author
andyandyandy
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Re: Solo 401 K questions

Post by andyandyandy »

DSInvestor wrote: IRA contributions are allowed above and beyond your Solo 401k contributions.
Just to double check Roth contribution beyond 401K option is not dependent on which company offers the plan Fidelity or Vanguard,right?
Saving$
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Re: Solo 401 K questions

Post by Saving$ »

Your personal Roth IRA contribution is not dependent upon whom your Solo 401k is with.
Roth 401k contribution IS. Your 401k plan has to allow for Roth contributions over and above the $17.5. I do not recall this being an option at Fidelity several years ago.
Topic Author
andyandyandy
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Re: Solo 401 K questions

Post by andyandyandy »

Thanks!
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