Solo 401(k) limits

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drake.archer
Posts: 5
Joined: Wed Apr 03, 2013 5:01 pm

Solo 401(k) limits

Post by drake.archer » Sun Aug 25, 2013 7:22 am

I have a question regarding the limits on a Roth Solo 401(k) plan, and couldn't find the specific answer on google, so I was hoping I would be able to find the answer here.

If I earned $10,000 for performing a service, would I be able to contribute $10,000 to the Roth Solo 401(k) (and pay taxes using other funds), or would I be limited to the post tax earnings (somewhere around $5300 :( )?

This would be the only self-employed earnings this year, so I was hoping I would be able to put all of it in the Roth Solo 401(k). No 401(k) from employer to speak of.

Thank you,

Spirit Rider
Posts: 8315
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401(k) limits

Post by Spirit Rider » Sun Aug 25, 2013 7:34 am

It would be based on your net self-employment earnings. Which are your self-employment revenue - expenses - 1/2 Self Employment Tax (employer portion).

Just like as a W2 employee of a business 401k, any income taxes and employee FICA do not reduce your income.

mah001
Posts: 302
Joined: Fri Sep 28, 2012 9:30 am

Re: Solo 401(k) limits

Post by mah001 » Sun Aug 25, 2013 3:43 pm

I agree with Spirit Rider. Am assuming the $10,000 is NET income and this is Self Employment & not a partnership or corporation.

A couple of comments: If $4700 is going to taxes, can't you currently save some or all of that with pretax deferrals?

If you were to go pretax deferral route and if roth-k isn't set up yet, you can adopt a SIMPLE IRA by the approaching deadline and get the same deduction with lower overhead.

drake.archer
Posts: 5
Joined: Wed Apr 03, 2013 5:01 pm

Re: Solo 401(k) limits

Post by drake.archer » Sun Aug 25, 2013 5:33 pm

mah001 wrote:I agree with Spirit Rider. Am assuming the $10,000 is NET income and this is Self Employment & not a partnership or corporation.

A couple of comments: If $4700 is going to taxes, can't you currently save some or all of that with pretax deferrals?

If you were to go pretax deferral route and if roth-k isn't set up yet, you can adopt a SIMPLE IRA by the approaching deadline and get the same deduction with lower overhead.
The $10,000 will be net (the product is just me typing, so no expenses to speak of) before taxes. This is a a sole proprietorship. I was hoping to have the solo 401k in one of those self directed setups where I can invest in promissory notes issued by a relative. This will be my 'risky' money, as the rest of my Roth IRA and hopefully future Traditional 401(k) (from my full time employer - they're taking a while to set this up) will be with Vanguard. The supposed return on these notes will be more than 10%/year, so I believe that it is worth the risk. If I do a Roth Solo 401(k), wouldn't I avoid the taxes on the promissory notes in the future?

I'm currently in the 25% tax bracket, but 8% (CA), and I'm being optimistic that I'll be in a higher tax bracket in the future. Considering those issues, I want to think that paying the taxes now and getting tax free returns on high return promissory notes will be more profitable.

Does this seem like a risky IRS audit bet?

Update: the relative is not directly above/below me in the family tree.

ossipago
Posts: 101
Joined: Wed Apr 21, 2010 4:31 pm

Re: Solo 401(k) limits

Post by ossipago » Sun Aug 25, 2013 6:03 pm

I don't see why it would raise IRS flags, beyond the general flags they have for the self-employed. With the small amounts of SE income you are dealing with, that risk is probably negligible unless you are already a high net-income individual.

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