Solo 401k question

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DrFIRE
Posts: 8
Joined: Wed Sep 12, 2018 5:38 pm

Solo 401k question

Post by DrFIRE » Wed Sep 12, 2018 5:44 pm

Hello,

I had a question regarding Solo 401ks. I get most of my income from a W2 job, but I have a side business with my wife for consulting. Currently the income is a few thousand per year, but we hope to grow that in the future. we have a two member LLC taxed as a general partnership.

my understanding of a solo 401k is that we can contribute the employer contribution of up to 25% of the income subject to self employment tax. Since I max out my $18,500 403b through my W2 job I cant do any employee contribution. My wife stays at home, though, so can she contribute all of her K1 income up to the maximum employee contribution?

thanks for your help!

Spirit Rider
Posts: 8915
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401k question

Post by Spirit Rider » Wed Sep 12, 2018 10:21 pm

If you have a partnership with only the two spouses as partners you don't have to file on a Form 1065. You can elect to file as a qualified joint venture see Schedule C Instructions. It is far easier with no K-1s.

Your spouse can make employee elective contributions up to 100% of her net self-employment earnings (bussiness profit - 1/2 SE tax).

The maximum employer contribution for self-employed individuals is 20% of net self-employment earnings. However, employer contributions are limited to (net self-employment earning - employee elective contributions ) / 2.

Also, all employees must receive the exact same employer contribution rate. This is true whether they are spouses or not. If your spouse's employer contribution rate is limited, so will yours.

You can just give both of you 20% employer contributions. Then her employee elective contribution will be limited to her net self-employed earnings - (her employer contribution * 2).

Greenman72
Posts: 154
Joined: Fri Nov 01, 2013 2:17 pm

Re: Solo 401k question

Post by Greenman72 » Thu Sep 13, 2018 8:30 am

Spirit Rider wrote:
Wed Sep 12, 2018 10:21 pm
If you have a partnership with only the two spouses as partners you don't have to file on a Form 1065. You can elect to file as a qualified joint venture see Schedule C Instructions. It is far easier with no K-1s.
+1 However, using this strategy, you could find yourself paying a lot of SE tax in the future, should the business ever take off. However, the Sch. C vs. 1065/1120S decision is another topic entirely.

Again, I maintain that for most (one-man-gang) businesses, a SEP-IRA is easier than a Solo 401k. With the SEP, you're limited to 20% of earnings, rather than $18,500 + 20% of earnings. Plus, being an IRA, the balance counts toward IRA aggregation rules if you try to do a Roth conversion.

401k's are somewhat harder to implement and maintain, especially if get >$250k in assets. And if you're making $200k+, there's no difference in what you can contribute.

DrFIRE
Posts: 8
Joined: Wed Sep 12, 2018 5:38 pm

Re: Solo 401k question

Post by DrFIRE » Thu Sep 13, 2018 7:49 pm

Thanks for the replies, thats very helpful!

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