Question on using Solo 401K for 2018 Tax Year

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kblagron
Posts: 3
Joined: Sun Feb 24, 2019 3:00 am

Question on using Solo 401K for 2018 Tax Year

Post by kblagron » Sat Apr 13, 2019 2:03 am

This is my first post, but have been reading a lot on here, and have started adopting the Bogleheads philosophy with my investments. I have a situation that I am unsure about and wanted to get an opinion.

I retired 2-1/2 years ago at 57 yo, and in 2018 I got an offer I couldn't refuse to return to the workforce as an independent contractor, but only worked a short time and earned about $85K. I set up a solo 401K plan at Fidelity as I knew I could benefit from contributing both as the employer and employee to the plan. In total, I have the ability to move $40K into the plan - it was set up prior to 2019, and I need to move it by April 15th (or not).

The question is, as I was doing my taxes (TurboTax) - I am struggling to believe its a good move in my tax situation to move $40K of after tax money into what is essentially a Traditional IRA for a 10% savings in taxes this year? If the tax rates stay the same, I don't anticipate with my lifestyle of getting much past the 12% tax rate at $78K. Does it make sense to move $40K to save $4K now, knowing that it will get taxed down the road at roughly that same rate, assuming nothing changes in the tax law? I have over 4 years of after tax income available currently, along with a pension plus a large IRA to fund the rest of my life after that.

craimund
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Location: Virginia

Re: Question on using Solo 401K for 2018 Tax Year

Post by craimund » Sat Apr 13, 2019 5:46 am

If you will be in the 12+ % marginal rate in retirement, probably doesn't make sense to put 40K in pretax accounts for a 10% tax break.

If you want to max your 2018 contribution, I would contribute the max to employer discretionary (20% of SE income - one half SE tax) which is pretax and contribute the rest ($24,500) to a Roth 401K. Fidelity doesn't have a Roth 401K option so may want to look elsewhere for this. I used this strategy in 2018 with T. Rowe Price.

You can also separately contribute $6500 to a ROTH IRA.

Edited - Vanguard also has a Roth 401K option.
"When you ain't got nothing, you got nothing to lose"-Bob Dylan 1965. "When you think that you've lost everything, you find out you can always lose a little more"-Dylan 1997

dkoffer
Posts: 14
Joined: Mon Mar 26, 2018 8:41 pm

Re: Question on using Solo 401K for 2018 Tax Year

Post by dkoffer » Sat Apr 13, 2019 1:02 pm

Think about your state taxes as well.

Based on what you've said, I would think about doing the $18K employee contribution to a roth 401K.

JBTX
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Joined: Wed Jul 26, 2017 12:46 pm

Re: Question on using Solo 401K for 2018 Tax Year

Post by JBTX » Sat Apr 13, 2019 1:51 pm

It may actually be lower than 10% due to the 20% self employment deduction (which you may or may not be eligible depending on a lot of other factors.

On the flip side, would contributing allow you to take advantage of savers credit?

https://www.bogleheads.org/wiki/Saver%27s_credit

Topic Author
kblagron
Posts: 3
Joined: Sun Feb 24, 2019 3:00 am

Re: Question on using Solo 401K for 2018 Tax Year

Post by kblagron » Sun Apr 14, 2019 11:09 pm

Thanks for your help, I ended up going with a conversion of a Traditional IRA to a Roth IRA to maximize my AGI in the 12% bracket, and have elected to not use the Solo 401K. In the end, my tax benefits works out to be the roughly the same, i.e. - if I add in the $40K to the Solo 401K, I could take up to $72K conversion to a Roth IRA, and if I don't put any into the Solo 401K, I could convert $40K to a Roth, but have $40K in after tax funds.

niceguy7376
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Location: Metro ATL

Re: Question on using Solo 401K for 2018 Tax Year

Post by niceguy7376 » Mon Apr 15, 2019 4:46 pm

Trad IRA to Roth IRA - Did you do it today but counting it against 2018 tax filing?

Topic Author
kblagron
Posts: 3
Joined: Sun Feb 24, 2019 3:00 am

Re: Question on using Solo 401K for 2018 Tax Year

Post by kblagron » Wed Apr 17, 2019 2:14 am

I did it in December. I thought I would get an extra tax benefit with the Solo 401K, but couldn't see it to be an advantage.

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