Pay a stay-at-home spouse, fund a solo-401k?
Pay a stay-at-home spouse, fund a solo-401k?
Hello - I've been an avid reader of this board for 15 years, and I've found the information and discourse to be invaluable. Thanks for all of the help! For once, I haven't been able to find an answer to my question by searching previous posts.
My wife has recently become a stay-at-home-mom. We're looking for ways to invest more in tax-advantaged accounts, above what is available in our 401k, IRAs, HSA, and 529s. Is it allowable to for our family to pay my wife for her child-care services? Could we then use that income to fund a Solo-401k? It feels like that would enable us to get an additional ~$30k per year into a tax-advantaged account, assuming a market-competitive rate of $15/hr.
I'm fairly surprised not to find that question anywhere on the web. I'm sure that I'm not the first to come-up with the idea, so I wonder if it runs afoul of IRS guidelines
My wife has recently become a stay-at-home-mom. We're looking for ways to invest more in tax-advantaged accounts, above what is available in our 401k, IRAs, HSA, and 529s. Is it allowable to for our family to pay my wife for her child-care services? Could we then use that income to fund a Solo-401k? It feels like that would enable us to get an additional ~$30k per year into a tax-advantaged account, assuming a market-competitive rate of $15/hr.
I'm fairly surprised not to find that question anywhere on the web. I'm sure that I'm not the first to come-up with the idea, so I wonder if it runs afoul of IRS guidelines
Re: Pay a stay-at-home spouse, fund a solo-401k?
Let me start by saying I haven't looked at any regulations or done any research. So, this is just my opinion...
My guess is that you can't legally pay your wife to take care of her own children. On the other hand, if she were to start a business (with all the legal licenses, etc) of watching children and get, at least, one other child to watch, then you might be able to pull it off.
Note that she would have to pay taxes on the money she made. You might end up paying taxes on the money twice. Once when you make it and once when she makes it.
If you have extra money, you'd likely be better off simply investing the money in a regular account. This has several advantages: Capital gains treatment on all gains. Directly available without penalty if needed. Available for use with other tax plans, like 529 plans for kid's educations.
While IRA-type investments are good, they aren't so much better than investment accounts that one should try to bend the law to create them out of thin air.
My guess is that you can't legally pay your wife to take care of her own children. On the other hand, if she were to start a business (with all the legal licenses, etc) of watching children and get, at least, one other child to watch, then you might be able to pull it off.
Note that she would have to pay taxes on the money she made. You might end up paying taxes on the money twice. Once when you make it and once when she makes it.
If you have extra money, you'd likely be better off simply investing the money in a regular account. This has several advantages: Capital gains treatment on all gains. Directly available without penalty if needed. Available for use with other tax plans, like 529 plans for kid's educations.
While IRA-type investments are good, they aren't so much better than investment accounts that one should try to bend the law to create them out of thin air.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
Re: Pay a stay-at-home spouse, fund a solo-401k?
You'll find plenty if you flip your search. Look for "Pay children to work in family business"
The regulations have specific gaps designed for families employing family members in their business for the purpose of paying into retirement accounts. The most common application is hiring your kids and then paying into their retirement accounts.
You might have to "create" a business that then pays your wife for services rendered, but creating an LLC is trivial.
The regulations have specific gaps designed for families employing family members in their business for the purpose of paying into retirement accounts. The most common application is hiring your kids and then paying into their retirement accounts.
You might have to "create" a business that then pays your wife for services rendered, but creating an LLC is trivial.
The mightiest Oak is just a nut who stayed the course.
Re: Pay a stay-at-home spouse, fund a solo-401k?
Thanks for the responses! They make it clear that this idea doesn't hold water. First we'd have to pay taxes on her income - including Medicare and Social Security - those taxes make a Roth a non-starter. Alternatively, if we used pre-tax money to fund a traditional 401k, instead of getting capital-gains treatment, we'd be subject to ordinary income taxes upon withdrawal.
Appreciate the guidance!
Appreciate the guidance!
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Re: Pay a stay-at-home spouse, fund a solo-401k?
Why not do a spousal IRA?
Re: Pay a stay-at-home spouse, fund a solo-401k?
I have a very good six figure W2 job where I work full time and a six figure 1099 LLC where I work part time on nights and weekends.
My wife is a stay-at-home mom. She also does the bookkeeping for my LLC (sends out invoices mostly). For that, I pay her about $20k per year. Of that, she puts $17,500 as the employee portion into her Solo 401k. Then she puts whatever Turbo Tax tells me she can put in for the employer portion.
Since I max out my 401k employee portion at work, I am only allowed to put in the employer portion of my 1099 LLC income which is still fairly substantial.
It's a little bit different than what you originally asked about, but similar enough that I thought I'd mention it.
My wife is a stay-at-home mom. She also does the bookkeeping for my LLC (sends out invoices mostly). For that, I pay her about $20k per year. Of that, she puts $17,500 as the employee portion into her Solo 401k. Then she puts whatever Turbo Tax tells me she can put in for the employer portion.
Since I max out my 401k employee portion at work, I am only allowed to put in the employer portion of my 1099 LLC income which is still fairly substantial.
It's a little bit different than what you originally asked about, but similar enough that I thought I'd mention it.
Re: Pay a stay-at-home spouse, fund a solo-401k?
I think it would be better for your wife to work and have her own 401K account and ability to carry on with employment during her lifetime at a level she deserves. Your initial premise though is obviously off as there are other services you could pay for as well that a spouse does - preparing dinner, shopping, etc.
Re: Pay a stay-at-home spouse, fund a solo-401k?
Interesting.epitomist wrote:I have a very good six figure W2 job where I work full time and a six figure 1099 LLC where I work part time on nights and weekends.
My wife is a stay-at-home mom. She also does the bookkeeping for my LLC (sends out invoices mostly). For that, I pay her about $20k per year. Of that, she puts $17,500 as the employee portion into her Solo 401k. Then she puts whatever Turbo Tax tells me she can put in for the employer portion.
Since I max out my 401k employee portion at work, I am only allowed to put in the employer portion of my 1099 LLC income which is still fairly substantial.
It's a little bit different than what you originally asked about, but similar enough that I thought I'd mention it.
Is your wife a sole proprietor or does she have have another business like LLC? Does your LLC pay her as 1099?
Re: Pay a stay-at-home spouse, fund a solo-401k?
My wife is a stay-at-home mom. The LLC that receives the 1099 for my side income is a Husand-and-wife LLC (see http://www.irs.gov/Businesses/Small-Bus ... -Companies )jane1 wrote: Interesting.
Is your wife a sole proprietor or does she have have another business like LLC? Does your LLC pay her as 1099?
Other than the money my wife earns in our H&W LLC, she has no income at all. The LLC does not pay her with 1099 - it is a disregarded entity as far as the IRS is concerned.
Re: Pay a stay-at-home spouse, fund a solo-401k?
jane1 wrote:Interesting.epitomist wrote:I have a very good six figure W2 job where I work full time and a six figure 1099 LLC where I work part time on nights and weekends.
My wife is a stay-at-home mom. She also does the bookkeeping for my LLC (sends out invoices mostly). For that, I pay her about $20k per year. Of that, she puts $17,500 as the employee portion into her Solo 401k. Then she puts whatever Turbo Tax tells me she can put in for the employer portion.
Since I max out my 401k employee portion at work, I am only allowed to put in the employer portion of my 1099 LLC income which is still fairly substantial.
It's a little bit different than what you originally asked about, but similar enough that I thought I'd mention it.
Is your wife a sole proprietor or does she have have another business like LLC? Does your LLC pay her as 1099?
Paying her as a 1099 contract worker is probably stretching the law but I don't think it matters much. The downside of paying the wife (doesn't matter how) is that she owes SS taxes. Paying 15% versus 0-2.9% isn't great. Now depending on how you value her SS and the tax deferral, it might still make sense.