Solo 401K match or Should I set up normal 401k?

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EinAustin
Posts: 34
Joined: Wed Sep 28, 2016 7:17 pm

Solo 401K match or Should I set up normal 401k?

Postby EinAustin » Sun Jul 16, 2017 12:10 pm

Hello Bogleheads. I am going to open a solo 401 K for my wife and me. My wife asked me if our company can do any type of matching of the employee contributions (on top of the employer profit share) as if we were a larger company. I can't find anywhere that says it's possible or not so I was wondering if anyone here knows.

Also I plan to hire an employee in the future so can anyone give me guidance if I should just set up a normal 401K right now or is there still an advantage of only using the solo 401k. There are fees attached to a normal 401k so that wouldn't make sense in the short run unless I can also do some additional matching with that type of 401K.

Thank you

DSInvestor
Posts: 10476
Joined: Sat Oct 04, 2008 11:42 am

Re: Solo 401K match or Should I set up normal 401k?

Postby DSInvestor » Sun Jul 16, 2017 12:18 pm

Solo 401k allows for employer profit share contributions which can be up to 25% of your self employed compensation. If you're an S-Corp where you and your wife are each paid 60K by the S-Corp, you could each contribute 18K employee salary deferral + 15K (25% of 60K) as employer profit share. Each plan participant can elect how much to contribute as employee salary deferral. The employer profit share contribution percentage must be the same for all plan participants. If the company contributes 25% employer profit share to you, it must also contribute 25% employer profit share for your wife.

If you're incorporated and paying yourselves W-2 salary, the employee salary deferral must be withheld from your paychecks during the year (i.e. before DEC 31, 2017 for tax year 2017). Once the contribution is withheld, the business makes the contribution on your behalf out of the corp account. The employer profit share contribution made by the corporation out of the corp account and is above and beyond the salary.

The 18K limit for Solo 401k employee salary deferral contributions is shared with other 401k/403b plans. If you have a main job where you contribute to a 401k, that would affect how much employee salary deferral you can contribute to your Solo 401k. Let us know if you or your wife contribute to other employer plans.

If believe there is a provision to allow use of Solo 401k when there are other employees as long as those employees work less than a certain number of hours. If you find that you cannot use Solo 401k and you don't want to pay fees for a traditional 401k, you can look at SIMPLE-IRA.

EinAustin
Posts: 34
Joined: Wed Sep 28, 2016 7:17 pm

Re: Solo 401K match or Should I set up normal 401k?

Postby EinAustin » Sun Jul 16, 2017 6:08 pm

Thank you. To answer a couple questions...

We do file as a S Corp
We do not qualify for any other 401K

Each of us receives W2 wages. We use Paychex for our payroll. Are you saying the money has to come directly out of our account by Paychex and be sent to Schwab for the 401 k instead of us writing an individual check?

Spirit Rider
Posts: 5684
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401K match or Should I set up normal 401k?

Postby Spirit Rider » Sun Jul 16, 2017 7:15 pm

Yes.

401k employee deferrals must come out of compensation not already received. The only way to accomplish this is by payroll deduction. Also, deferrals can not occur prior to a written employee deferral election.

S-Corp 401k employer contributions must come from corporation accounts. Normally, It must be the exact same percentage (maximum 25% of W-2 wages) for each employee. To answer a question from your first post, the 25% limit applies for all employer contributions. So an employer match would be redundant and achieve nothing.

In no case can you make 401k contributions from personal accounts.

EinAustin
Posts: 34
Joined: Wed Sep 28, 2016 7:17 pm

Re: Solo 401K match or Should I set up normal 401k?

Postby EinAustin » Sun Jul 16, 2017 9:23 pm

Thank you. I didn't realize the contributions had to come out of payroll. It's not a problem for my salary but my wife will have to get paid slightly more to have $18,000 remaining in her payroll.

DSInvestor
Posts: 10476
Joined: Sat Oct 04, 2008 11:42 am

Re: Solo 401K match or Should I set up normal 401k?

Postby DSInvestor » Sun Jul 16, 2017 9:48 pm

EinAustin wrote:Thank you. I didn't realize the contributions had to come out of payroll. It's not a problem for my salary but my wife will have to get paid slightly more to have $18,000 remaining in her payroll.


It's good that you asked about this now. We've had posters running S-Corps ask about this after year end only to find out they have missed the window to withhold the 18K employee salary deferral.

Spirit Rider
Posts: 5684
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401K match or Should I set up normal 401k?

Postby Spirit Rider » Sun Jul 16, 2017 11:53 pm

EinAustin wrote:Thank you. I didn't realize the contributions had to come out of payroll. It's not a problem for my salary but my wife will have to get paid slightly more to have $18,000 remaining in her payroll.

Actually, it needs to be a little more than you might expect because of the employer contribution.

If you are planning to give yourself the 25% maximum employer contribution, then you must also give your wife a 25% employer contribution.

Under 415c, the annual addition (employee + employer contributions) cannot be > 100% of compensation. So if you want your wife to have the full $18K employee deferral, her W-2 compensation must be >= $22.5K = $18K + (25% * $18K = $4,500).

EinAustin
Posts: 34
Joined: Wed Sep 28, 2016 7:17 pm

Re: Solo 401K match or Should I set up normal 401k?

Postby EinAustin » Mon Jul 17, 2017 7:01 am

Thank you. She was scheduled to be paid $24,000 so $12,000 remains for this year. I can bump it up to $18,000 but I'll have to figure out with Paychex if the entire amount of pay can go to the 401k. In other words there will be $18,000 remaining but not if SS, fed taxes etc are also taken out.

Spirit Rider
Posts: 5684
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401K match or Should I set up normal 401k?

Postby Spirit Rider » Mon Jul 17, 2017 7:26 am

The 401k deferral can only be met after other mandatory deductions (income tax witholding, FICA, etc...). However, this should not be a problem if you are making the full 25% PS contribution.

As I said, the minimum salary would need to be $22.5K. The 415c requirement must be met even though the employer contribution is made by the S-Corp and not deducted from payroll.

The only time there would not be enough space is if she was making Roth deferrals. In this case you would need to decrease her allowances until all deductions before deferral left >= $18K. You would compensate by increasing your allowances.

Spirit Rider
Posts: 5684
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401K match or Should I set up normal 401k?

Postby Spirit Rider » Mon Jul 17, 2017 7:46 am

To answer the other question you had about adding employees later. The IRS allows you to restrict 401k eligiblity to those; with >= 1 year of service with >= 1,000 hours/year and those >= age 21.

You just select this in the adoption agreement, making sure to grandfather current employees (you and your wife). This will allow you to hire < ~1/2 time employees and those under 21 while maintaining a one-participant 401k. Also, you will have one year after hiring > ~1/2 time employees before you will need to terminate or amend the one-participant 401k to a full fledged plan.

Note: Vanguard's Individual 401k's adoption agreement does not allow any employee eligibility restrictions. You will need to use Fidelity or one of the other providers that do.

EinAustin
Posts: 34
Joined: Wed Sep 28, 2016 7:17 pm

Re: Solo 401K match or Should I set up normal 401k?

Postby EinAustin » Mon Jul 17, 2017 9:46 am

Thank you. I opened the account with Schwab because Vanguard wouldn't let me do something else (unrelated to this thread) anyway.

Thank you for the information about future employees.

EinAustin
Posts: 34
Joined: Wed Sep 28, 2016 7:17 pm

Re: Solo 401K match or Should I set up normal 401k?

Postby EinAustin » Thu Jul 20, 2017 10:08 am

One more question...
Schwab gave me a form and said the $18,000 employee contribution can be contributed at one time by writing a check from our personal accounts instead of it coming out of our monthly payroll.

Is there some exemption for Solo 401k that allows this because that seems to contradict the messages in this thread. There is so much nuance to these accounts I want to make sure I'm not misunderstanding things.

DSInvestor
Posts: 10476
Joined: Sat Oct 04, 2008 11:42 am

Re: Solo 401K match or Should I set up normal 401k?

Postby DSInvestor » Thu Jul 20, 2017 12:47 pm

EinAustin wrote:One more question...
Schwab gave me a form and said the $18,000 employee contribution can be contributed at one time by writing a check from our personal accounts instead of it coming out of our monthly payroll.

Is there some exemption for Solo 401k that allows this because that seems to contradict the messages in this thread. There is so much nuance to these accounts I want to make sure I'm not misunderstanding things.


There are different rules for S-Corp with W-2 salary and Sole proprietors filing Schedule C. The other option to write a personal check is likely for sole proprietors. When operating an S-Corp with W-2 salaries, the solo 401k employee contributions must be withheld from the payroll. When done this way, the W-2 forms issued for tax prep will reflect the contribution amounts and codes for types of contributions (Roth vs Traditional 401k).

Spirit Rider
Posts: 5684
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401K match or Should I set up normal 401k?

Postby Spirit Rider » Thu Jul 20, 2017 6:36 pm

DSInvestor wrote:
EinAustin wrote:One more question...
Schwab gave me a form and said the $18,000 employee contribution can be contributed at one time by writing a check from our personal accounts instead of it coming out of our monthly payroll.

Is there some exemption for Solo 401k that allows this because that seems to contradict the messages in this thread. There is so much nuance to these accounts I want to make sure I'm not misunderstanding things.

There are different rules for S-Corp with W-2 salary and Sole proprietors filing Schedule C. The other option to write a personal check is likely for sole proprietors. When operating an S-Corp with W-2 salaries, the solo 401k employee contributions must be withheld from the payroll. When done this way, the W-2 forms issued for tax prep will reflect the contribution amounts and codes for types of contributions (Roth vs Traditional 401k).

In addition, S-Corp employer contributions must be made from the corporation's accounts.

EinAustin
Posts: 34
Joined: Wed Sep 28, 2016 7:17 pm

Re: Solo 401K match or Should I set up normal 401k?

Postby EinAustin » Fri Jul 21, 2017 8:59 am

Thank you for your responses!


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