solo 401k

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pteam
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solo 401k

Post by pteam » Sun Apr 13, 2014 7:36 pm

I have a solo 401k for my wife and I. I want to max out each 401k to the maximum allowed 52k each for a total of 104k. We have two businesses one for myself that will fund the 200% match, and a different business for my wife which will fund her 200% match. How much income/profit is needed for each company to be able to contribute the max 200% match which is $34,500 plus the $17,500 personal for a total of $52k each. I mean doesn't the companies have to make a certain amount of income/profit to be able to contribute this much?

Anything else I should be aware of?

Thanks!

Spirit Rider
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Re: solo 401k

Post by Spirit Rider » Sun Apr 13, 2014 11:49 pm

The identified 200% match does not exist. A solo 401k does not have an employer elective match. It has an employee elective deferral and a employer non-elective profit sharing. The profit sharing max is 25% of compensation, but is calculated differently for a sole proprietor than an S-Corp.

For a Sole Proprietor it is 20% of self-employment income (business profit - 1/2 SE tax). So if the maximum contribution is $34.5K, you would need 172.5K of self-employment income. This would require a business profit of $185.6K.

For a S-Corp it is 25% of W2 wages. So if the maximum contribution is $34.5K, you would need $138K of wages. The Corp would also require the $34.5K for the contribution and $10.6K of employer FICA. So you would need $183.1K of business profit + Unemployment Insurance and maybe workman's comp.

So generally, you need about $185K of business profit to max out the profit sharing.

J295
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Re: solo 401k

Post by J295 » Sun Apr 13, 2014 11:51 pm

Take a look at Fidelity's online calculator in the retirement section on its site.

Spirit Rider
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Re: solo 401k

Post by Spirit Rider » Mon Apr 14, 2014 12:16 am

Take J295's advice.

My calculation for the sole proprietor number is incorrect. In my calculation to go from self-employment income to business profit, I was adding back in the 1/2 SE tax. Unfortunately, I was not incorporating the $117K max wage base. The sole proprietor number is more like $182K..

My calculation for the S-Corp is also incorrect. The W2 wage calculation is correct, but I was not incorporating the $117K max wage base to calculate the employer FICA. The employer FICA would be more like $9.25K. The S-Corp number is also more like 182K.

The sole proprietor and the S-Corp require about the same business profit to max out the profit sharing. That is to be expected. The sole proprietor would pay Medicare tax on the $34.5K contribution ($500), but the S-Corp would not. However, the S-Corp would pay UI and depending on the state one, both, or neither might pay WC.

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pteam
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Re: solo 401k

Post by pteam » Mon Apr 14, 2014 1:14 am

Ok I'm looking into this. Thank you for your help

Is the business "profit" before the 401k money is subtracted as an expense?

Also our corps are S corps.

The calc at http://www.solo401kcalculator.com shows I need about $145k each to get to the $52k for 401k, Is that not right?

Also if the business has $50k in expenses that means I would need 50k more income?

Also fidelity had several calculators in the retirement section but I didn't see one that pertained to solo 401k. I surely could have missed it

DSInvestor
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Re: solo 401k

Post by DSInvestor » Mon Apr 14, 2014 2:44 am

If you're S-Corps paying W-2 salary, the Solo 401k contribution is easy. It is purely driven by your W-2 salary.

1) Employee salary deferral 17.5K (23K if over age 50).
2) Employer profit share can be 0-25% of W-2 salary.

If you're under age 50, you can max out for 52K if salary is 138K (17.5K + 25% of 138K = 52K)

Don't forget that you can each also contribute to Traditional or Roth IRA.
Wiki

Spirit Rider
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Re: solo 401k

Post by Spirit Rider » Mon Apr 14, 2014 10:00 am

In this context I was using "business profit" to be (revenue minus non-employee expenses). This is because you asked for how much income/profit is required max out a solo 401k. In this case the business must pay a W2 wage of $138K, employer FICA share of $9.25K, employer profit sharing of $34.5K and any other business employee expenses. So this is $182K+

The business must have the funds to pay all of these expenses. So yes, if the business has 50K in other expenses, the revenue must be $50K greater than that list. So you would need about $235K in revenue.

I ran the calculator at the address you provided. I came up with $138K to make the maximum $52K contribution. It has to be, because the maximum S-Corp profit sharing contribution occurs at a W2 wage that would yield a $34.5K contribution at a 25% contribution rate. Stated a different way, it is 4 * $34.5K.

For the Fidelity Solo 401k Calculator go to Self-Employed 401(k) Plans and click on the link in the IRS maximum contribution section/

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Re: solo 401k

Post by DSInvestor » Mon Apr 14, 2014 10:24 am

Spirit Rider, In my conversations with the small business retirement groups at Fidelity and Vanguard, I don't think that the S-Corp Employer Profit Share contribution requires a profit. It is driven only by W-2 salary. However, It is important that the S-Corp has sufficient cash to meet all expenses (including FICA, business taxes and employer profit share contributions). The S-Corp could have accumulated lots of cash from previous years and having a slow year this year.
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pteam
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Re: solo 401k

Post by pteam » Mon Apr 14, 2014 10:32 am

Also what would change if half my salary is w2 and half is 1099 consultant? I could change things around if needed.

DSInvestor
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Re: solo 401k

Post by DSInvestor » Mon Apr 14, 2014 10:45 am

pteam wrote:Also what would change if half my salary is w2 and half is 1099 consultant? I could change things around if needed.
If the solo 401k is set up for the S-Corp's tax ID, then only the S-Corp's W-2 salary is eligible for consideration for the Solo 401k contributions?

S-Corp Solo 401k employer profit share contributions are an expense of the S-Corp. The S-Corp files it's own tax return which flows through to your personal 1040 tax return via K-1.

The 1099 income will be handled by Schedules C and SE.

Assuming this is one business (consulting), why do you have 1099 income and S-Corp income? Why not tell all clients that you're now an S-Corp and they can save themselves the work of generating you 1099s?
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pteam
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Re: solo 401k

Post by pteam » Mon Apr 14, 2014 11:24 am

It's our actual company that pays us thru 1099. In the past our company just paid us thru 1099. But now that we setup solo 401k we have to make changes.

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Re: solo 401k

Post by Spirit Rider » Mon Apr 14, 2014 10:27 pm

DSInvestor wrote:Spirit Rider, In my conversations with the small business retirement groups at Fidelity and Vanguard, I don't think that the S-Corp Employer Profit Share contribution requires a profit. It is driven only by W-2 salary. However, It is important that the S-Corp has sufficient cash to meet all expenses (including FICA, business taxes and employer profit share contributions). The S-Corp could have accumulated lots of cash from previous years and having a slow year this year.
You are probably correct. An S-Corp can have retained earnings and borrow money. Both of these would allow an S-Corp to fund wages as well as profit sharing to allow a maximum contribution in a year it did not have sufficient revenue.

As a practical matter, I think the OP was probably looking for the single year requirements

pshonore
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Re: solo 401k

Post by pshonore » Tue Apr 15, 2014 7:49 am

So lets say I have a S-Corp with 50K of revenue. The S-Corp can "borrow" 25K (from my other funds) and pay me a salary of 75K (ignoring FICA, etc)? And borrow more for the employer match? Sounds kind of odd.

niceguy7376
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Re: solo 401k

Post by niceguy7376 » Tue Apr 15, 2014 8:10 am

The S-Corp could have accumulated lots of cash from previous years
.

Each year, when S Corp does its returns, it issues a K1 to the owner for the profit. If this amount is not withdrawn and deposited in indiv bank account, is this the way to accumulate cash for future years?

So, If i dont take out the K1 amounts and then use that as company contributions to solo 401k, it is same as contributing after tax money to regular 401K plans (to reach the 52k limit)

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Re: solo 401k

Post by Spirit Rider » Tue Apr 15, 2014 9:36 am

pshonore wrote:So lets say I have a S-Corp with 50K of revenue. The S-Corp can "borrow" 25K (from my other funds) and pay me a salary of 75K (ignoring FICA, etc)? And borrow more for the employer match? Sounds kind of odd.
There better be no "" around the borrowing. An S-Corp is just like any other business and can engage legitimate business activities (loans) like any other business. I am not a professional, nor did I sleep at Hilton Express last night. You would have to talk to a CPA about a loan between the S-Corp and it's owner.

Spirit Rider
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Re: solo 401k

Post by Spirit Rider » Tue Apr 15, 2014 10:05 am

niceguy7376 wrote:
The S-Corp could have accumulated lots of cash from previous years
.

Each year, when S Corp does its returns, it issues a K1 to the owner for the profit. If this amount is not withdrawn and deposited in indiv bank account, is this the way to accumulate cash for future years?

So, If i dont take out the K1 amounts and then use that as company contributions to solo 401k, it is same as contributing after tax money to regular 401K plans (to reach the 52k limit)
This is well beyond my knowledge level. We really need a CPA or tax attorney to chime in.

In a C-Corp, dividends are taxed only when distributed and will be double-taxed. In an S-Corp, all net income after expenses (including wages) is construed as distributions and taxed whether distributed or not (even though they are called distributions). The tradeoff and main purpose is no double-taxation.

My personal thought is that "no, this not the same as after tax employee deferrals". My reasoning is that all employer contributions must be pre-tax. I think it is more likely you would be making a don-deductible contribution. Whether you can claim a basis for this or not I do not know.

We are kind of going down a speculative rat hole here. Funding from past or future years would be much cleaner with a C-Corp.

pshonore
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Re: solo 401k

Post by pshonore » Tue Apr 15, 2014 11:43 am

I agree, thats why I asked the question. Otherwise you (the S-Corp) could borrow the money regardless of profit, use it to pay yourself on the W2 (allowing you to defer 17.5K) and make the employer match. And what would that do to the S-Corp basis? Where is SeattleCPA when we need him? (He's probably very busy today, being the last day of tax season)

ERISA Stone
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Re: solo 401k

Post by ERISA Stone » Sun Jul 13, 2014 9:31 pm

Spirit Rider wrote:The identified 200% match does not exist. A solo 401k does not have an employer elective match. It has an employee elective deferral and a employer non-elective profit sharing. The profit sharing max is 25% of compensation, but is calculated differently for a sole proprietor than an S-Corp.
I am looking and I can't find that an elective match is not allowed in a solo-k. I read it in one article but am having trouble finding any IRS publication to confirm. Do you happen to have a source?

Spirit Rider
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Re: solo 401k

Post by Spirit Rider » Sun Jul 13, 2014 10:30 pm

ERISA Stone wrote:
Spirit Rider wrote:The identified 200% match does not exist. A solo 401k does not have an employer elective match. It has an employee elective deferral and a employer non-elective profit sharing. The profit sharing max is 25% of compensation, but is calculated differently for a sole proprietor than an S-Corp.
I am looking and I can't find that an elective match is not allowed in a solo-k. I read it in one article but am having trouble finding any IRS publication to confirm. Do you happen to have a source?
I don't have any specific prohibition reference.

Just what is described as allowed in IRS Publication 560, Chapter 4 Qualified Plans, Chapter 5 Table and Worksheets
for the Self-Employed.

Also, the following IRS reference One-Participant 401(k) Plans

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Hayden
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Re: solo 401k

Post by Hayden » Mon Jul 14, 2014 9:38 am

This idea of funding the solo 401k from retained earnings is very interesting to me. So, if I can't do solo 401k this year because I have employees this year, I can just leave the $ in the company, and use the retained earnings to fund the solo 401k for next year.

I just ran tax caster and it worked there. I guess I should try it out in Turbotax.

Anyone see issues with this strategy?

ERISA Stone
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Re: solo 401k

Post by ERISA Stone » Mon Jul 14, 2014 9:47 am

Hayden wrote:This idea of funding the solo 401k from retained earnings is very interesting to me. So, if I can't do solo 401k this year because I have employees this year, I can just leave the $ in the company, and use the retained earnings to fund the solo 401k for next year.

I just ran tax caster and it worked there. I guess I should try it out in Turbotax.

Anyone see issues with this strategy?
I don't know why you couldn't use retained earnings from a previous year to fund the profit sharing plan but you would still have the 25% deductible limit on current year income.

Just curious - are you waiting to adopt a 401(k) plan because you don't want the additional administrative expenses of the 2nd participant? If so, are you going to hire employees in the future?

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Hayden
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Re: solo 401k

Post by Hayden » Mon Jul 14, 2014 9:59 am

ERISA Stone wrote:
Hayden wrote:This idea of funding the solo 401k from retained earnings is very interesting to me. So, if I can't do solo 401k this year because I have employees this year, I can just leave the $ in the company, and use the retained earnings to fund the solo 401k for next year.

I just ran tax caster and it worked there. I guess I should try it out in Turbotax.

Anyone see issues with this strategy?
I don't know why you couldn't use retained earnings from a previous year to fund the profit sharing plan but you would still have the 25% deductible limit on current year income.

Just curious - are you waiting to adopt a 401(k) plan because you don't want the additional administrative expenses of the 2nd participant? If so, are you going to hire employees in the future?
My company is an an S Corp, so it seems that I could fund the wages and the company contribution from retained earnings. This would give me negative net income for the business. On my personal tax return, this negative income would offset dividend income and capital gains. At least that's what I'm thinking....

I'm putting off adopting a 401k plan because I don't want the added expense (I've discussed it with my employees, and this is not something they value; they want $ in their paycheck). I'm thinking of putting in place a SIMPLE IRA for this year, then switching to a Solo 401k in 2015 or 2016 when I no longer have employees.

Spirit Rider
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Re: solo 401k

Post by Spirit Rider » Mon Jul 14, 2014 12:23 pm

Hayden wrote:This idea of funding the solo 401k from retained earnings is very interesting to me. So, if I can't do solo 401k this year because I have employees this year, I can just leave the $ in the company, and use the retained earnings to fund the solo 401k for next year.

I just ran tax caster and it worked there. I guess I should try it out in Turbotax.

Anyone see issues with this strategy?
It may seem like semantics, but there is really no such thing as retained earnings in an S-Corp (C-Corp yes). All net profits after expenses (including salary and profit sharing) are deemed distributed whether they remain in the business accounts or not.

The discussion was about using other than current year business profits for retirement plan contributions. The thought was that it was permissible, because an S-Corp can lose money for any given year. In fact under certain retirement plan constructs, IRS requirements are that you must make the employer contributions even if it causes the corporation to lose money. We left that as needing some input from an expert.

As for your plan, you are no longer eligible for a solo 401k plan if you add eligible employees. I'm inclined to think you must terminate the plan, not just avoid contributions. Here again we need some knowledgeable assistance.

ERISA Stone
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Re: solo 401k

Post by ERISA Stone » Mon Jul 14, 2014 12:51 pm

Spirit Rider wrote:
Hayden wrote:This idea of funding the solo 401k from retained earnings is very interesting to me. So, if I can't do solo 401k this year because I have employees this year, I can just leave the $ in the company, and use the retained earnings to fund the solo 401k for next year.

I just ran tax caster and it worked there. I guess I should try it out in Turbotax.

Anyone see issues with this strategy?
It may seem like semantics, but there is really no such thing as retained earnings in an S-Corp (C-Corp yes). All net profits after expenses (including salary and profit sharing) are deemed distributed whether they remain in the business accounts or not.

The discussion was about using other than current year business profits for retirement plan contributions. The thought was that it was permissible, because an S-Corp can lose money for any given year. In fact under certain retirement plan constructs, IRS requirements are that you must make the employer contributions even if it causes the corporation to lose money. We left that as needing some input from an expert.

As for your plan, you are no longer eligible for a solo 401k plan if you add eligible employees. I'm inclined to think you must terminate the plan, not just avoid contributions. Here again we need some knowledgeable assistance.
Hayden doesn't have a 401(k) plan yet, does he? I thought he was looking at the solo(k) vs. SEP IRA.

A solo(k) is not separate from a 401(k) plan. It is simply a 401(k) plan with one participant (+1 for spouse). I often read that an employer cannot have employees but this isn't quite accurate. The company cannot have another employee that is eligible to participate. You can still have employees as long as they have not met eligibility for the plan.

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pteam
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Re: solo 401k

Post by pteam » Wed Dec 17, 2014 9:51 pm

Guys I have already contributed the max to my solo 401k. Is there a way to have my wife also contribute max / another $52k for this year? Were both "employed" by the company we own. Is this as a spouse contribution or an "employee" ? Thanks for your help!

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Hayden
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Re: solo 401k

Post by Hayden » Thu Dec 18, 2014 10:20 am

pteam wrote:Guys I have already contributed the max to my solo 401k. Is there a way to have my wife also contribute max / another $52k for this year? Were both "employed" by the company we own. Is this as a spouse contribution or an "employee" ? Thanks for your help!
The employee deferral is done through payroll. Have you already processed the final payroll for 2014? If not, I don't see why she couldn't do the employee deferral. The company would make its contribution based on the W2 wages.

Caduceus
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Re: solo 401k

Post by Caduceus » Thu Dec 18, 2014 10:35 am

You should go through the IRS worksheet in order to get a definitive answer to how much you should contribute. It seems daunting, but really isn't. I have found Vanguard's calculator to be accurate.

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Re: solo 401k

Post by niceguy7376 » Thu Dec 18, 2014 11:27 am

OP, you need to provide more clear info. In the first post of this thread, you said
pteam wrote:We have two businesses one for myself that will fund the 200% match, and a different business for my wife which will fund her 200% match.Thanks!
now you say:
pteam wrote:Guys I have already contributed the max to my solo 401k. Is there a way to have my wife also contribute max / another $52k for this year? Were both "employed" by the company we own. Is this as a spouse contribution or an "employee" ? Thanks for your help!
So what happened to the second company that you initially said? Which of these two companies have employees outside of you or your wife?
Do they both have 401k plans separately?

In the middle threads you also said:
pteam wrote:It's our actual company that pays us thru 1099. In the past our company just paid us thru 1099. But now that we setup solo 401k we have to make changes.
So does it mean that the company that you own used to give 1099 until this year? I dont really understand this.

Forum members dont provide legal advice, just their opinion based on the understanding of the rules. But, to provide clear and concise input, you need to provide the full and clear picture.

ERISA Stone
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Re: solo 401k

Post by ERISA Stone » Thu Dec 18, 2014 12:27 pm

I didn't see this mentioned previously so I just want to make sure you are aware. If you and your wife own 100% of both companies, they are part of a controlled group, meaning for retirement plan purposes, several provisions are combined (testing, limits, etc). One thing that concerns me is if one of the companies has an employee, he/she would have to be considered for testing purposes for any retirement plan related to either company. You can't create a retirement plan for the company without employees just to avoid providing the benefit to the employees of a related company. Now, you could still pass nondiscrimination testing with controlled groups, but if only highly compensated employees (HCEs) are benefiting (the owners in this case), it won't pass.

I'm not saying you are doing this but I just want to throw it out there to cover the topic.

Here's an IRS link on related companies http://www.irs.gov/pub/irs-tege/epchd704.pdf

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pteam
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Re: solo 401k

Post by pteam » Thu Dec 18, 2014 7:48 pm

We setup a second company where my wife is the owner but didn't funnel any income to it yet. We work on the internet so we can decide which company gets paid. The first company I am the only owner but could she get a solo 401k contribution as a spouse as it's an account that we own setup thru fidelity? Or since we file joint taxes is the income "ours" and this we both made the income and she can contribute to the solo 401k also? This is my first year trying to do this and I'll be showing my accountant this thread also so thanks for your help!

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