Side Hustle Newbie, Solo 401k Best Use Question

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akokopuff
Posts: 3
Joined: Sat Nov 17, 2018 5:48 pm

Side Hustle Newbie, Solo 401k Best Use Question

Post by akokopuff » Sat Nov 17, 2018 6:26 pm

Hi all. This is my first time posting here, having been recommended by a friend. I've read through some threads that seem to have relevant questions/topics, and thought I'd pose my own. Please let me know if I'm not formatting correctly/this is in the wrong board!

I am embarking on a new side hustle, which consists of contract work that is upfront few months of work, then paid through royalties. I want to shelter as much as I can through a Solo 401k (I haven't opened one yet), but at the same time, want to keep the complications to a minimum, because I have enough headaches in my life (I have a lot of health issues I'm dealing with at the moment).

Background
  • So I'm 29, single, no kids, working and living in NYC. My day job is in IT, and my side hustle is in education.
  • Multiple disabilities from random medical conditions, but work full-time with full benefits. But afraid might need to scale down from working full-time to part-time, or going freelance/contract when I get diagnosed with the next "big thing."
  • I'm an absolute side-hustle-paying-taxes newbie.
  • My questions are with Solo 401ks.
  • I just recently received a promotion and raise at my day job last week, so my "new" salary for 2019 will be $75,000.
  • For 2019, I plan on maxing out my HSA, Roth IRA, and Company 401k.
  • For 2018, I've maxed out Roth IRA, HSA, and by end of the year would've put in a little over $9,000 into 401k.
  • I don't need the side hustle $$$ to live on, so I don't really need to spend any of it. So would like to find ways to protect as much as I can, for future use (in case I fall into full disability and can't work full time anymore).
Side Hustle
  • I recently started a contract creating online courses, where I get $2000 as royalty advance, and once the course is live and the $2000 is "paid off," I will start getting monthly checks for the royalties.
  • I am slated to create 4 of these courses (as of right now), and the first of them will be live around next March.
  • Income from the side hustle in 2019 could be anything from $5000~$12,000 (or more) per course, and potentially 2-3 of them running at once. It's hard to tell until the course(s) are released.
I got the first $1000 advance earlier this month, and will get the next $1000 I believe end of January 2019. After that, it'll be nothing for a few months as the $2000 is "paid off," and then I'll start earning minimum $300-500/mo. After the 1st course is live, we'll probably get right in to creating the 2-4th courses, so once those go live, I'll have $300-500/mo coming in for each for 1-2 years (the general lifecycle of online courses). The content manager I'm working with said that with the type of course I'm creating, it could potentially be more in the thousands per month in royalties, but we won't really know until we release it, and see how the public feels about it. (I'm cautiously optimistic at $500/mo per course.)

To protect as much as I can of my side hustle (NYC taxes are grueling!!), I am considering Solo 401k (I was told SEP IRA might get in the way of future Backdoor Roth, if I choose to do it, so I decided Solo 401k is probably the better way to go). I didn't get anywhere close to maxing out my Company 401k this year, so I think I can dump in most of the $1000 (minus the required taxes/social security/etc.) into the "employee" contribution portion in the Solo 401k. (Please correct me if my understanding is incorrect.)

Questions
  • Is my conclusion correct that the $1000 I received this month can go 100% into the Solo 401k's employEE space for 2018, because I still have $7k left "there" since I only put in $9k into it this year? (Minus taxes and expenses, of course.)
  • For 2019, since my "employee" space is going to be filled up with my company 401k, I would only be able to put in 25% of my side hustle income (after fees/taxes/social security/expenses/whatnot) into the employER side?
  • And I should do this dump at the END of 2019 so that I am not going over the 25% (I heard there are penalties if I put in too much)?
  • Where are the recommended places to open Solo401k? I think I saw that Fidelity had lower fees than Vanguard? (Almost everything I personally hold is at Vanguard.)
  • Is there a recommended reading for complete newbies trying to break in to freelance/side hustles and the tax implications? I keep on seeing things like "Schedule SE form" and "199A Rule," and I'm afraid I'm missing A LOT of things I should figure out BEFORE I open a Solo 401k.
Thank you all SO much for your time. This side hustle kind of just... "happened," so I've been stressing over opening a Solo 401k (all the tax/legal ramifications of it) for the past month, having been completely unprepared. Especially because taxes here are so painful. I figured I should ask for advice from the knowledgeable folks here.

If there are any books or resources you recommend as kind of like "here's the basics you should know about freelancing/self-employment/side hustling," I am ALL ears.

aristotelian
Posts: 4874
Joined: Wed Jan 11, 2017 8:05 pm

Re: Side Hustle Newbie, Solo 401k Best Use Question

Post by aristotelian » Sat Nov 17, 2018 7:51 pm

OP, I would recommend putting all your numbers in TurboTax at the end of the year. You can click a button to determine your max Solo 401k contribution.

Spirit Rider
Posts: 9109
Joined: Fri Mar 02, 2007 2:39 pm

Re: Side Hustle Newbie, Solo 401k Best Use Question

Post by Spirit Rider » Sat Nov 17, 2018 10:11 pm

Self-employed individuals have until the tax filing deadline (~4/15) including (~10/15) to make both employee elective contributions and employer contributions.

However, you must adopt a one-participant 401k plan and make an employee elective election by 12/31.

The maximum employee elective contribution is up to 100% of net self-employment earnings (business profit - 1/2 SE tax). Business profit = business income - business expenses. The employee elective contribution limit is 2018 = $18,500, 2019 = $19,000 per person.

The maximum employer contribution is 25% of compensation, but for self-employed individuals is calculated as 20% of net self-employment earnings.

I agree with @aristotelian. You should wait until you file your taxes to let the tax software calculate your contributions. Just remember to adopt the plan and make the election by 12/31.

akokopuff
Posts: 3
Joined: Sat Nov 17, 2018 5:48 pm

Re: Side Hustle Newbie, Solo 401k Best Use Question

Post by akokopuff » Sun Nov 18, 2018 9:33 am

Hi Guys,
Thank you so much for responding!
So what I'm taking away is:
  • End of 2018, stick all my incomes into TurboTax (or something), and see what the max contribution amount is for Solo401k, and throw that in
  • And do the same thing at the end of 2019?
  • Open the one-participant 401k plan and make the employee election by 12/31, but I can dump my money in any time between then and 4/15 for 2018
  • I can only contribute 20% as the employER because I'm self-employed, and the side hustle isn't an LLC or S-Corp?
  • Is it easy to swing between employEE and employER contribution spaces in the 401k portal, or is it something where I have to do a hard switch/have separate log-ins, etc?
Thank you again so much.

Spirit Rider
Posts: 9109
Joined: Fri Mar 02, 2007 2:39 pm

Re: Side Hustle Newbie, Solo 401k Best Use Question

Post by Spirit Rider » Sun Nov 18, 2018 10:19 am

akokopuff wrote:
Sun Nov 18, 2018 9:33 am
So what I'm taking away is:
  • End of 2018, stick all my incomes into TurboTax (or something), and see what the max contribution amount is for Solo401k, and throw that in, and do the same thing at the end of 2019? Correct.
  • Open the one-participant 401k plan and make the employee election by 12/31, but I can dump my money in any time between then and 4/15 for 2018. Also, make sure you designate the effective date 1/1/18 in the adoption agreement. This is necessary in order for your contributions to be based on the entire year's income and not just after adoption. Technically, you have until 10/15 to make the contributions if you file an extension even if you file on time.
  • I can only contribute 20% as the employER because I'm self-employed, and the side hustle isn't an LLC or S-Corp? Yes, but note by default a single member LLC is treated by the IRS as a disregarded entity and you still file as an sole proprietor. Only if you elect the LLC to be treated as an S-Corp does it change your tax status.
  • Is it easy to swing between employEE and employER contribution spaces in the 401k portal, or is it something where I have to do a hard switch/have separate log-ins, etc? You should be aware that some providers do not allow online contributions. I am not familiar with all one-participant 401k providers that do, but I can't believe any of them require a separate log-in.

Soon2BXProgrammer
Posts: 538
Joined: Mon Nov 24, 2014 11:30 pm

Re: Side Hustle Newbie, Solo 401k Best Use Question

Post by Soon2BXProgrammer » Sun Nov 18, 2018 10:26 am

Spirit Rider wrote:
Sun Nov 18, 2018 10:19 am
akokopuff wrote:
Sun Nov 18, 2018 9:33 am
[*]Is it easy to swing between employEE and employER contribution spaces in the 401k portal, or is it something where I have to do a hard switch/have separate log-ins, etc? You should be aware that some providers do not allow online contributions.I am not familiar with all one-participant 401k providers that do, but I can't believe any of them require a separate log-in.[/list]

Just my experience:

at vanguard, you have to use the "small business account login" to make any contributions (employEE or employER, so make sure you fill out the online form correctly), and it can pull from a bank account online.

then you can use your personal vanguard login to see your account balance and make follow-on trades.

unlike an IRA where you can designate a spouse to see the account/transact on the account, i have yet to find a way where you can do that for the 401k account at vanguard.

akokopuff
Posts: 3
Joined: Sat Nov 17, 2018 5:48 pm

Re: Side Hustle Newbie, Solo 401k Best Use Question

Post by akokopuff » Tue Nov 20, 2018 12:16 pm

Thank you all! I will open an account somewhere, and let tax software tell me how much I can put in to the account. 😊

robphoto
Posts: 18
Joined: Tue Sep 25, 2018 12:42 pm

Re: Side Hustle Newbie, Solo 401k Best Use Question

Post by robphoto » Wed Nov 21, 2018 9:51 am

I just set up solo 401K at Vanguard, Roth and Traditional.

If you have your other assets there, the fee may be waived (not sure what the threshold is, they can tell you)

When you call they will route you to the 401K specialists who can walk you through the setup, etc.

Good luck!

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