To solo 401k or ...

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Topic Author
djeayzonne
Posts: 53
Joined: Wed Dec 06, 2017 2:14 pm

To solo 401k or ...

Post by djeayzonne » Fri Jul 05, 2019 10:25 pm

I was 100% self-employed between 2013 to 2018.
I built up my sole-proprietorship services enough that I could max out 2 Roth IRAs and the employee contribution limit for solo 401k.
For 2018, I was also able to add employer contribution for the first time.

I changed back over to a full-time position with a company starting December last year. I am still doing my services business as I have time. New employer does not currently offer 401k.

I just now realized through reading other threads that I cannot make contributions to the solo 401k unless I make profit. I was planning to only work enough on the business to fill up the employee contribution. I have about 30k of annual expenses which means I basically have to earn 50k to max out employee contribution.

Seems like it isn't worth the extra employment taxes (plus a lot more effort/time to make the 50k). What do you think? The way I'm feeling right now, I should just start a taxable account instead.

If you need more info, just let me know what you need.

aristotelian
Posts: 7381
Joined: Wed Jan 11, 2017 8:05 pm

Re: To solo 401k or ...

Post by aristotelian » Sat Jul 06, 2019 7:55 am

Sounds to me that you are mental accounting somewhat. Since your employer doesn't offer a 401k, this is your only chance to max tax deferred savings. Just because your paycheck is 0 from your business, it is the same financially as if you were maxing a 401k from your job and earning 19k from your business.

The alternative is to earn the same income from your job and only 15k from your business. I would take the 19k tax deferred.

My wife earns about 20k from an her job, which has an excellent 401k. It feels weird to work and basically get no need to paycheck, but she is not definitely earning money and no maxing the 401k has been a huge benefit to our new savings rate.

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

Re: To solo 401k or ...

Post by Spirit Rider » Sat Jul 06, 2019 9:59 am

What will be your W-2 Social Security (SS) Wages for the year? For the amount of (W-2 Box 3 SS wages + 92.35% of business profit) > the SS maximum wage base (2019 = $132,900). You will only pay 2.9% in SE taxes.

What kind of business has $30K in fixed expenses?

Topic Author
djeayzonne
Posts: 53
Joined: Wed Dec 06, 2017 2:14 pm

Re: To solo 401k or ...

Post by djeayzonne » Sat Jul 06, 2019 3:51 pm

aristotelian wrote:
Sat Jul 06, 2019 7:55 am
Sounds to me that you are mental accounting somewhat. Since your employer doesn't offer a 401k, this is your only chance to max tax deferred savings. Just because your paycheck is 0 from your business, it is the same financially as if you were maxing a 401k from your job and earning 19k from your business.

>>>Yes, somewhat, that's why I am asking here.

The alternative is to earn the same income from your job and only 15k from your business. I would take the 19k tax deferred.

>>>I don't understand what you mean here. Can you explain that a bit more?

My wife earns about 20k from an her job, which has an excellent 401k. It feels weird to work and basically get no need to paycheck, but she is not definitely earning money and no maxing the 401k has been a huge benefit to our new savings rate.

>>> I don't have a problem with not making a profit, I just wanted to max the solo 401k with minimal effort.

Topic Author
djeayzonne
Posts: 53
Joined: Wed Dec 06, 2017 2:14 pm

Re: To solo 401k or ...

Post by djeayzonne » Sat Jul 06, 2019 4:00 pm

Spirit Rider wrote:
Sat Jul 06, 2019 9:59 am
What will be your W-2 Social Security (SS) Wages for the year? For the amount of (W-2 Box 3 SS wages + 92.35% of business profit) > the SS maximum wage base (2019 = $132,900). You will only pay 2.9% in SE taxes.

>>> yeah, it should be. That's good to know.

What kind of business has $30K in fixed expenses?

>>> it does fluctuate every year, but that's been about the average.

aristotelian
Posts: 7381
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Re: To solo 401k or ...

Post by aristotelian » Sat Jul 06, 2019 8:24 pm

djeayzonne wrote:
Sat Jul 06, 2019 3:51 pm
aristotelian wrote:
Sat Jul 06, 2019 7:55 am

The alternative is to earn the same income from your job and only 15k from your business. I would take the 19k tax deferred.

>>>I don't understand what you mean here. Can you explain that a bit more?
The big benefit of 401k is tax deferral. With no 401k from your job, Solo 401k is your best option for tax deferral. Say you are in the 22% tax bracket now. You can contribute $19k tax free to Solo 401k. If you don't put it in the Solo 401k, that money will be taxed at 22%, so you would pay $4180 in income tax, for net of only $14280 after tax.

You can use your standard deduction to pay low or possibly zero tax on withdrawals in retirement, keeping most or all of the $19K. To me, that is getting the biggest bang for the buck from your business income.

Topic Author
djeayzonne
Posts: 53
Joined: Wed Dec 06, 2017 2:14 pm

Re: To solo 401k or ...

Post by djeayzonne » Sat Jul 06, 2019 9:58 pm

aristotelian wrote:
Sat Jul 06, 2019 8:24 pm

The big benefit of 401k is tax deferral. With no 401k from your job, Solo 401k is your best option for tax deferral. Say you are in the 22% tax bracket now. You can contribute $19k tax free to Solo 401k. If you don't put it in the Solo 401k, that money will be taxed at 22%, so you would pay $4180 in income tax, for net of only $14280 after tax.

You can use your standard deduction to pay low or possibly zero tax on withdrawals in retirement, keeping most or all of the $19K. To me, that is getting the biggest bang for the buck from your business income.
Ok, thanks. Yeah, I know that the big benefit is the deferral. But what's the point if I have to work a lot more in my business than I really want to AND have to pay more taxes just so that I can put money into the solo 401k? I made this thread because I might be missing the forest for the trees or something.

Before I realized that I have to make a profit, my thoughts were make only 20-25k in the business, put 19k in the solo 401k AND reduce federal taxes on my W2 income because of a loss on the business side.

So, now I know that if I make enough money from the business to max out the employee contribution, I will have to pay a lot more taxes in total. Plus, I'm not sure trying to make 50k or more is really realistic as far as time constraints. 30-36k is proably pretty doable.

In this case, does it really make sense to try and put money into the solo 401k?

CFM300
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Re: To solo 401k or ...

Post by CFM300 » Sat Jul 06, 2019 10:39 pm

Run your side business however it makes sense in terms of profit and your overall life. If your full-time job already allows you to max your IRAs, then yes, put the net profits from the side business into a solo 401(k). But I wouldn't try to add even more time into your side-business, just for the opportunity to make additional 401(k) contributions. And if you want to invest beyond your IRAs and whatever you're allowed in your solo 401(k), then yes, contribute to a taxable account.

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JD Leonard
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Location: Jersey City, NJ

Re: To solo 401k or ...

Post by JD Leonard » Sun Jul 07, 2019 12:04 am

Do you have 30k annual business expenses regardless of how much you work for the business?

We don't have enough knowledge about your business to offer relevant advice, but might the easiest approach be to wind down the business and save $30k/year (minus whatever the loss saves you in taxes)?
- JD Leonard

aristotelian
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Joined: Wed Jan 11, 2017 8:05 pm

Re: To solo 401k or ...

Post by aristotelian » Sun Jul 07, 2019 5:01 am

djeayzonne wrote:
Sat Jul 06, 2019 9:58 pm
aristotelian wrote:
Sat Jul 06, 2019 8:24 pm

The big benefit of 401k is tax deferral. With no 401k from your job, Solo 401k is your best option for tax deferral. Say you are in the 22% tax bracket now. You can contribute $19k tax free to Solo 401k. If you don't put it in the Solo 401k, that money will be taxed at 22%, so you would pay $4180 in income tax, for net of only $14280 after tax.

You can use your standard deduction to pay low or possibly zero tax on withdrawals in retirement, keeping most or all of the $19K. To me, that is getting the biggest bang for the buck from your business income.
Ok, thanks. Yeah, I know that the big benefit is the deferral. But what's the point if I have to work a lot more in my business than I really want to AND have to pay more taxes just so that I can put money into the solo 401k? I made this thread because I might be missing the forest for the trees or something.

Before I realized that I have to make a profit, my thoughts were make only 20-25k in the business, put 19k in the solo 401k AND reduce federal taxes on my W2 income because of a loss on the business side.

So, now I know that if I make enough money from the business to max out the employee contribution, I will have to pay a lot more taxes in total. Plus, I'm not sure trying to make 50k or more is really realistic as far as time constraints. 30-36k is proably pretty doable.

In this case, does it really make sense to try and put money into the solo 401k?
I am not following your logic or business model. Why would you run a business if not to make profit? Regardless, the amount of profit or loss is independent of the 401k question. Assuming you have profit, Solo 401k is a great choice to avoid tax on up to $19k + 20%.

Topic Author
djeayzonne
Posts: 53
Joined: Wed Dec 06, 2017 2:14 pm

Re: To solo 401k or ...

Post by djeayzonne » Mon Jul 08, 2019 6:09 am

This seems to be more complicated than I thought.

I guess I should just consult with a CPA.

Thanks for the replies.

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