Spouse Contribution to Solo 401(k)

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
User avatar
Topic Author
southerndoc
Posts: 1266
Joined: Wed Apr 22, 2009 7:07 pm
Location: Atlanta

Spouse Contribution to Solo 401(k)

Post by southerndoc »

I just found out that when I open a solo 401(k), my wife has the potential to contribute to it.

I've tried to find information on this but can't: I'm assuming that she can only contribute if she is working for me and being paid? Or can I contribute on her behalf even though she is not working (she is a stay at home mother)? If so, what is the limit or where can I find this?
notmyhand
Posts: 496
Joined: Mon Jul 15, 2013 7:43 pm

Re: Spouse Contribution to Solo 401(k)

Post by notmyhand »

I believe she has to be an employee or part owner of the business (depending how it is set up).
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Spouse Contribution to Solo 401(k)

Post by DSInvestor »

southerndoc wrote:I just found out that when I open a solo 401(k), my wife has the potential to contribute to it.

I've tried to find information on this but can't: I'm assuming that she can only contribute if she is working for me and being paid? Or can I contribute on her behalf even though she is not working (she is a stay at home mother)? If so, what is the limit or where can I find this?
The limit for her solo 401k contributions will depend on her income from the self employed business, just as yours is.
You may want to give some Solo 401k custodians a call and speak to their small business retirement groups. I have spoken to Vanguard and Fidelity about Solo 401k, and found them to be extremely knowledgeable. If your business is incorporated and paying you a W-2 salary, I imagine that the business would need to pay your wife a W-2 salary as well in order for her to contribute to Solo 401(k). If you're a sole proprietor filing schedule C for your self employed business, I'm not sure how a spouse fits in to the picture regarding solo 401k.
Wiki
SGM
Posts: 3341
Joined: Wed Mar 23, 2011 4:46 am

Re: Spouse Contribution to Solo 401(k)

Post by SGM »

Limits for the 401k portion are 18K for age under 50 and 24K for 50 or greater for 2015. Then there is a profit sharing component that can bring it up to 53K or 59K for age greater than 50. If you are looking to greatly increase your family solo 401k amount and your business has sufficient income definitely hire your spouse. She has to have w-2 income, but it can be well worth paying the fica taxes to get this benefit. Possibly her SS benefits will go up with the extra income too.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Spouse Contribution to Solo 401(k)

Post by Spirit Rider »

DSInvestor wrote:If you're a sole proprietor filing schedule C for your self employed business, I'm not sure how a spouse fits in to the picture regarding solo 401k.
A sole proprietor has two options to provide income for a spouse in order for them to make a Solo 401k contribution.

Option 1: Setup payroll and pay her as a W2 employee. She must perform actual work and her pay must be at a FMV. Her contributions are limited by her W2 wages.

Option 2: Operate the business as a Qualified Joint Venture. Her contributions are limited by her interest in the business's net profits.

You elect Qualified Joint Venture by doing it. Each spouse files a Schedule C and a Schedule SE, based on their interest in the business, e.g. 50:50. See Schedule C instructions for Qualified Joint Venture on page C-2.

Both spouses must Materially Participate in the business. See Schedule C instructions for Material Participation on page C-4. It is a relatively easy burden to meet. For example; qualification 2. You wife works ten (10) hours per week (>= 500 hours/year), or the even easier qualification 3. your wife does bookkeeping of the business for two (2) hours per week (>= 100 hours/year) and you spend less than that on bookkeeping.
User avatar
gasdoc
Posts: 2039
Joined: Mon Nov 03, 2014 7:26 am

Re: Spouse Contribution to Solo 401(k)

Post by gasdoc »

I have a friend who is a traveling anesthesiologist, and he pays his wife a w-2 to manage his travel schedule. I, on the other hand, work in a single location, and I do not do my own billing. I cannot imagine convincing anyone that she works in my business 2 hours per week. The answer- it depends.
s2kmw
Posts: 29
Joined: Mon Feb 23, 2015 11:50 am

Re: Spouse Contribution to Solo 401(k)

Post by s2kmw »

I have a related question. I am planning ahead and wanted to know about the solo 401k for spouses as well. Here's my situation:

I have a traditional IRA for myself and spouse currently. Eventually, I will want to roll over those t-IRAs into a solo 401k to make room to do backdoor ROTHs as I plan on getting 1099 income in the future . Rolling over the t-IRA for myself into the solo 401k would be no problem. But could I roll over the t-IRA for my spouse into the same solo 401k (but under sub-account for her) if we structure a business together as joint owners? For example if I set up an LLC which states myself and my spouse are co-owners, could my wife and I both contribute the employEE portions to the solo 401k under our sub-accounts? Would rather stick with an LLC vs a qualified joint venture as that would be considered a sole proprietorship for asset protection reasons.

Thanks.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Spouse Contribution to Solo 401(k)

Post by Spirit Rider »

s2kmw wrote:I have a related question. I am planning ahead and wanted to know about the solo 401k for spouses as well. Here's my situation:

I have a traditional IRA for myself and spouse currently. Eventually, I will want to roll over those t-IRAs into a solo 401k to make room to do backdoor ROTHs as I plan on getting 1099 income in the future . Rolling over the t-IRA for myself into the solo 401k would be no problem. But could I roll over the t-IRA for my spouse into the same solo 401k (but under sub-account for her) if we structure a business together as joint owners? For example if I set up an LLC which states myself and my spouse are co-owners, could my wife and I both contribute the employEE portions to the solo 401k under our sub-accounts? Would rather stick with an LLC vs a qualified joint venture as that would be considered a sole proprietorship for asset protection reasons.

Thanks.
Yes. A multi-member LLC by default is considered a partnership by the IRS. You would file a partnership return.

The partnership would then adopt the Solo 401k. You and your wife would open individual accounts under that plan. You would then use the partnership's Schedule K-1s and individual Schedule SEs as the basis for your allowed contributions.
Madame Zenobia
Posts: 5
Joined: Wed Oct 26, 2011 9:09 am

Re: Spouse Contribution to Solo 401(k)

Post by Madame Zenobia »

If my wife and I operate a sole proprietorship as a qualified joint venture, and I meet the IRS threshold of participating materially in the business, but my wife earns the majority of the venture's income, would I be eligible to contribute:

--20% of MY individual earnings through the venture to a (shared)solo 401K, or
--20% of THE VENTURE's total earnings to a (shared) solo 401K? I don't mention the 'employee' contribution because I participate in my full-time employer's 401K.

If it's the latter (the venture's earnings), would we need to operate the sole proprietorship under a DBA (Doing Business As) name with business licenses rather than simply under my wife's name and my name? In other words, when figuring contributions to a (shared) solo 401K, how do you distinguish a qualified joint venture from two independent contractors each being paid separately? Going forward, should my wife and I both bill under the (as yet uncreated) DBA name of the sole proprietorship rather than billing under our own individual names?

I would appreciate any advice anyone has. Thank you for your help.
Madame Zenobia
Posts: 5
Joined: Wed Oct 26, 2011 9:09 am

Re: Spouse Contribution to Solo 401(k)

Post by Madame Zenobia »

And as a follow up, am I correct in assuming that if a spouse in a qualified joint venture can make an employer contribution to a (shared) solo 401K of 20% of the venture's total earnings, that 20% represents the total contribution that both spouses can make rather than an individual 'employer' contribution afforded to each spouse? In other words, since there is only one 'employer', both spouses in a qualified joint venture aren't EACH allowed to contribute 20% of the venture's earnings, are they (that would come to a 40% employer contribution)? I assume not, but thought I would confirm with the board.

Thank you for your help.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Spouse Contribution to Solo 401(k)

Post by Spirit Rider »

Yes, the net effect is that the maximum profit sharing is 20% of the venture's (net profit - 1/2 SE tax). As Always the devil is in the details.

With a Qualified Joint Venture, you apportion all Schedule C entries according to ownership. Therefore, you will each have a net profit on line 31. These are then combined on your joint Form 1040 line 12 and your individual Schedule SEs.

For your Solo 401k contributions you will each use your separate (net profit - 1/2 SE tax) to calculate your individual self-employment incomes. This is the maximum Solo 401K contribution and 20% of this is your maximum employer profit sharing contribution.

If you want to make the maximum Solo 401k contribution for your wife, make sure the business apportion is such that her self-employment income >= $30K (2015). This is because the profit sharing cannot be greater than 50% of (self-employment income - employee salary deferral). In 2015, $30K - $18K = $12K, 20% of $30K = $6K = 50% of $12K.

For future reference when self-employment income can be apportioned and it is desired to maximize Solo 401k contributions. A simple calculation can be made to determine the minimum self-employment income when you want to maximize both employee deferral and profit sharing.. It is simply that year's maximum employee salary deferral / 0.6. 2015 = $18K / 0.6 = $30K.

A qualified joint venture by definition needs to be a single joint venture. I really don't know the answer on whether the name matters.
ausmatt
Posts: 114
Joined: Sun Jan 02, 2011 12:53 pm

Re: Spouse Contribution to Solo 401(k)

Post by ausmatt »

I am trying to figure out a somewhat similar situation. Here's my scenario and what I think is optimal ...

Self - employed at a corporation and contributing maximum to 401k. not eligible for roth or regular IRA, but plan on doing some backdoor roths. tax bracket will be right near the edge of the 39.6% this year

Spouse -
- self-employed and just formed an LLC (and planning to treat as a "disregarded entity" from a fed tax perspective)
- in process of opening a solo 401k with vanguard
- expected gross income of ~$25,000 this year
- expected business expenses of $5,000 - $7,000

As there's no way we can get the business expenses above $15,000 even with creative methods, I believe the solo 401k maximization is the best bet for her. However, I wanted to see if I got this right --

1.) She pays herself a salary of $19,369 and elects for 100% salary deferral to 401k.
2.) Nets $18,000 to solo 401k after accounting for self-employment (SE) tax using Beacon Capital calculator
3.) Business can allocate $3,874 in profit sharing to her solo 401k (20% x salary of $19,369)
4.) The LLC owes $1,377 in SE taxes and she owes $1,377 in SE taxes = $2,754 in SE taxes due (I'm ignoring the 0.9% medicare kicker for now)
5.) Business shows a $0 (or negative) net income for the year (rev - expenses - salary - emp SE tax)
6.) Spouse owes federal income tax on $1,369 (due to self-employment tax gross up to achieve $18k in solo 401k contribution)
7.) Federal income tax deduction of $1,377 from the employer-paid portion of the SE tax, yielding $545 in savings at 39.6% tax

I'm not really sure I've got this exactly correct. A few questions for the wonderful gurus on this board:

(a) Is the math correct?
(b) Is there a way around the federal income tax related to the payroll self-employment tax?
(c) I don't believe it would make sense for me to participate and take advantage of the profit sharing due to an increase in my taxable income, correct?
(d) Are there any other investment instruments available for the business instead of paying her salary?

Thanks for any and all thoughts/advice/insights!!
pshonore
Posts: 8205
Joined: Sun Jun 28, 2009 2:21 pm

Re: Spouse Contribution to Solo 401(k)

Post by pshonore »

Business shows a $0 (or negative) net income for the year (rev - expenses - salary - emp SE tax)
Where does the money come from for the employer contribution. There's nothing left
pshonore
Posts: 8205
Joined: Sun Jun 28, 2009 2:21 pm

Re: Spouse Contribution to Solo 401(k)

Post by pshonore »

duplicate
ausmatt
Posts: 114
Joined: Sun Jan 02, 2011 12:53 pm

Re: Spouse Contribution to Solo 401(k)

Post by ausmatt »

pshonore wrote:
Business shows a $0 (or negative) net income for the year (rev - expenses - salary - emp SE tax)
Where does the money come from for the employer contribution. There's nothing left
From not claiming full expenses. But since this is a solo llc, the company doesn't actually operate as a separate entity for tax purposes. It looks just like a sole proprietorship ... So her money is mixed with mine for tax purposes and filing jointly. So there's fungability here.
pshonore
Posts: 8205
Joined: Sun Jun 28, 2009 2:21 pm

Re: Spouse Contribution to Solo 401(k)

Post by pshonore »

ausmatt wrote:
pshonore wrote:
Business shows a $0 (or negative) net income for the year (rev - expenses - salary - emp SE tax)
Where does the money come from for the employer contribution. There's nothing left
From not claiming full expenses. But since this is a solo llc, the company doesn't actually operate as a separate entity for tax purposes. It looks just like a sole proprietorship ... So her money is mixed with mine for tax purposes and filing jointly. So there's fungability here.
What is a Solo LLC? you're taxed as either an S-Corp, a Sole Prop, or a Partnership. Not claiming full expenses is really frowned upon by the IRS by the way. In any case, my belief is there's no employer contribution in your case with the numbers stated.
ausmatt
Posts: 114
Joined: Sun Jan 02, 2011 12:53 pm

Re: Spouse Contribution to Solo 401(k)

Post by ausmatt »

Meant to say sole prop llc for tax purposes.
pshonore wrote:
ausmatt wrote:
pshonore wrote:
Business shows a $0 (or negative) net income for the year (rev - expenses - salary - emp SE tax)
Where does the money come from for the employer contribution. There's nothing left
From not claiming full expenses. But since this is a solo llc, the company doesn't actually operate as a separate entity for tax purposes. It looks just like a sole proprietorship ... So her money is mixed with mine for tax purposes and filing jointly. So there's fungability here.
What is a Solo LLC? you're taxed as either an S-Corp, a Sole Prop, or a Partnership. Not claiming full expenses is really frowned upon by the IRS by the way. In any case, my belief is there's no employer contribution in your case with the numbers stated.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: Spouse Contribution to Solo 401(k)

Post by Spirit Rider »

ausmatt wrote:Meant to say sole prop llc for tax purposes.
A clearer description, a disregarded single member LLC taxed as a sole proprietorship.
1.) She pays herself a salary of $19,369 and elects for 100% salary deferral to 401k.
A self-employed person does not pay themselves a salary. Gross revenue of $25K and expenses of $5,631 would result in a net business profit of $19,369. The entire net business profit is simply available to the sole proprietor and flows through to Form 1040 line 12. There is no choice on this.
2.) Nets $18,000 to solo 401k after accounting for self-employment (SE) tax using Beacon Capital calculator
A net business profit of $19,369 results in a net self-employment income of $18,000. The maximum solo 401k employee salary deferral is 100% of self-employment income. Your number is correct
3.) Business can allocate $3,874 in profit sharing to her solo 401k (20% x salary of $19,369)
First, the maximum solo 401k contributions is 20% of net self employment income ($18K) = $3600. Second, as noted by pshonore, the employer contribution is limited to 50% of (net self-employment income - any employee salary deferral). 0.50 * ($18K - $18K) = $0. Therefore, given these numbers, the maximum solo 401k employer contribution is $0.
4.) The LLC owes $1,377 in SE taxes and she owes $1,377 in SE taxes = $2,754 in SE taxes due (I'm ignoring the 0.9% medicare kicker for now)
Remember, the LLC does not exist for tax purposes. The sole proprietor pays the entire SE tax. Also, your math is off, the SE tax is $2,737.
5.) Business shows a $0 (or negative) net income for the year (rev - expenses - salary - emp SE tax)
As I said earlier a sole proprietor does not have a salary. They have a net business profit (revenue - expenses) which flows through to their Form 1040. Then they are obligated for the SE tax on their Form 1040.
6.) Spouse owes federal income tax on $1,369 (due to self-employment tax gross up to achieve $18k in solo 401k contribution)
Not exactly, your items 6 and 7 offset each other
7.) Federal income tax deduction of $1,377 from the employer-paid portion of the SE tax, yielding $545 in savings at 39.6% tax
As noted in item 4, the correct SE tax is $2,737 and 1/2 the SE tax is $1,369. This offsets item 6 from above.
I'm not really sure I've got this exactly correct. A few questions for the wonderful gurus on this board:

(a) Is the math correct?
Assuming my math is correct which always could be suspect, your math is corrected as noted above.
(b) Is there a way around the federal income tax related to the payroll self-employment tax?
As noted in items 6 and 7, the two numbers offset and their would be no net federal income tax.
(c) I don't believe it would make sense for me to participate and take advantage of the profit sharing due to an increase in my taxable income, correct?
There is no employer contribution available in this scenario as noted in item 3. The employer contribution is limited by net self-employment income and employee salary deferrals. If you received some it would just reduce what was available to your spouse. There would be no net difference in your joint income.
(d) Are there any other investment instruments available for the business instead of paying her salary?
A sole proprietor business is the individual. The normal ways to reduce taxable income are self-employed retirement plans, self-employed health care deduction, and HSA. Then while not deductible, there is always a backdoor Roth if she doesn't have any traditional IRA assets (or rolls them into the Solo 401k).
ausmatt
Posts: 114
Joined: Sun Jan 02, 2011 12:53 pm

Re: Spouse Contribution to Solo 401(k)

Post by ausmatt »

Spirit Rider - this was excellent. I really appreciate your help in deciphering how this works. I think it's hard for me not to separate the business entity, but to just treat everything as just a sole proprietorship as you corrected for me several times. Thanks for taking the time to provide your insight.

As to all the questions regarding business expenses, etc. - there are several areas where she could choose to invest in the business or not. There are always many gray area expenses such as home office, meeting clients on a somewhat personal trip that could make the trip deductible, plus a whole host of pro-bono items that could be claimed. So, it's not black and white as some posters implied when it comes to what qualifies or what you should should claim as business expenses.
pshonore
Posts: 8205
Joined: Sun Jun 28, 2009 2:21 pm

Re: Spouse Contribution to Solo 401(k)

Post by pshonore »

ausmatt wrote:Spirit Rider - this was excellent. I really appreciate your help in deciphering how this works. I think it's hard for me not to separate the business entity, but to just treat everything as just a sole proprietorship as you corrected for me several times. Thanks for taking the time to provide your insight.

As to all the questions regarding business expenses, etc. - there are several areas where she could choose to invest in the business or not. There are always many gray area expenses such as home office, meeting clients on a somewhat personal trip that could make the trip deductible, plus a whole host of pro-bono items that could be claimed. So, it's not black and white as some posters implied when it comes to what qualifies or what you should should claim as business expenses.
The easiest way to figure retirement plan contributions is to use this calculator:

http://www.sepiracalculator.com/

Fill in the boxes and check the graph at the bottom of the resulting page.

As far as figuring SE tax by itself, IRS Form SE is the way to go. For a person who is under the SS earnings limit, the formula is fairly simple:

net business profit X .9235 X .153 (most folks are unaware of the .9235 adjustment step)
Post Reply