Solo401k Contributions

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Topic Author
dbogleheadmd
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Joined: Sun Nov 29, 2015 8:38 pm

Solo401k Contributions

Post by dbogleheadmd » Tue Oct 29, 2019 2:10 pm

Alright -- first post here. Got most/all my education from this site so much appreciation to those out there providing assistance.

I started a new side gig and had a question about contributions to my new solo 401k account. I set up my solo401k account in Feb of 2019 with Vanguard. Over the course of the year, I've accumulated approximately 10k in earnings from this side gig. The 1099 contract payments have come in at a rate of ~1k per month and were immediately put in a separate/distinct Ally savings account for the consulting gig (I have an EIN number). Assuming no other income, I can contribute the 10k in earnings directly from the Ally savings account to the solo 401k at Vanguard. Not complicated. No issues, right?

Two follow-up questions that get a bit more into the weeds to confirm my understanding:
1) Since ALL of my 1099 contract income is being put into the solo401k I pay no taxes on the 10k in earnings, correct?
2) This Ally savings account has accumulated approximately $75 in interest. My understanding is that this cannot be contributed to the solo401k. Is this correct? If I can't contribute this to my solo 401k then I want to get rid of it. Could I simply roll this into my personal bank account? If that's the case, I would then pay tax on the $75 of earned interest, right?

Double checking so I don't mess this up first time around. Thanks for your help!

:sharebeer Cheers :sharebeer

terran
Posts: 1018
Joined: Sat Jan 10, 2015 10:50 pm

Re: Solo401k Contributions

Post by terran » Tue Oct 29, 2019 4:41 pm

I don't see any problem contributing directly from Ally to Vanguard as long as Vanguard can pull from an outside account to the solo 401(k) (Fidelity requires a check for contributions, etrade will pull from an outside account, I don't know about Vanguard).

1) You'll still need to pay self employment tax. If $10k is all of your income you won't pay tax on it anyway as it's below the standard deduction. You might just mean this is all of your earned income though. You won't be able to contribute the full $10K. By my calculation you can contribute $9,294.00
to account for the 1/2 of self employment tax that must be deducted.

2) Correct. Only income earned from the business can be contributed, not interest, even if it's earned in a business account.

A couple of other concerns...

You say you opened the solo 401(k) in February 2019. Did you make the effective date of the plan 1/1/2019? If not you can only contribute based income you received after the effective date. You might be able to restate the plan document before the end of the year to change the effective date if necessary.

You might consider contributing to Roth 401(k). The first reason would be if you really have no other income since the standard deduction will mean you don't pay any tax anyway, so you would be putting the money in an account that you'll have to pay tax on in the future for no current benefit. The second reason is that, even if you do have other income, traditional solo 401(k) contributions reduce your section 199a Qualified Business Income (QBI) deduction, so you only get the equivalent of 80% of the tax savings that you'd normally get. You'd be better of contributing to a traditional IRA as that would get you the full tax deduction without a reduction of the QBI deduction.

If you can post a more complete picture of your tax situation people can probably offer you more guidance. All income sources (1099, capital gains, interest, dividends, traditional IRA/401(k) withdrawals, traditional to Roth IRA conversions, etc), and filing status.

Topic Author
dbogleheadmd
Posts: 4
Joined: Sun Nov 29, 2015 8:38 pm

Re: Solo401k Contributions

Post by dbogleheadmd » Tue Oct 29, 2019 7:41 pm

Thanks for the reply. Trying to keep the post as succinct as possible. Good main (W2) income stream of 180k this year. Didn’t factor in the self employment tax. I’ll look into that a bit more and how the other income affects this.
I’ll look into how the 199a QBI deduction plays out. Still seems to me this 401k route is the best tax haven for this money, even if I only get 80% of the saving.
Dates shouldn’t be an issue as no side hustle income came in during January — good pick-up though.

Let me know if there are other aspects I’m missing. Good food for thought so far.

fyre4ce
Posts: 351
Joined: Sun Aug 06, 2017 11:29 am

Re: Solo401k Contributions

Post by fyre4ce » Tue Oct 29, 2019 7:52 pm

Do you have a 401k at your W2 job, and if so, have you already or will you contribute $19k to it? If so, your solo 401k contributions will be limited. You only get one $19k elective deferral per year, regardless of how many jobs and 401ks you have. If so, you’ll only be able to contribute 20% of net business earnings (after 1/2 SE tax subtracted) to the solo 401k, and only as traditional, not Roth.

Topic Author
dbogleheadmd
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Joined: Sun Nov 29, 2015 8:38 pm

Re: Solo401k Contributions

Post by dbogleheadmd » Tue Oct 29, 2019 9:16 pm

Changed jobs, but had a 403b at my last job — put 9k in it. Was going to put the 10k currently referenced through the side hustle in a solo-401k, totaling 19k in contributions for the year. Don’t have enough side hustle income to contribute employer amount. :annoyed

Topic Author
dbogleheadmd
Posts: 4
Joined: Sun Nov 29, 2015 8:38 pm

Re: Solo401k Contributions

Post by dbogleheadmd » Wed Oct 30, 2019 6:12 am

To confirm, if my 1099 income is 10k for 2019, how can I calculate the self employment tax that must be deducted prior to contributing to the solo401k? Is the math below correct?

Doing the calculation, I believe you take the $10,000 in profits x 92.35% x 15.3% x 50%. This comes out as $706.48. 10,000-706.48 = 9293.52

Thus, I can contribute $9,293.52 to the 401k as an employee contribution. Not enough income for an employer contribution.

Math work out?

nolesrule
Posts: 1346
Joined: Thu Feb 26, 2015 10:59 am

Re: Solo401k Contributions

Post by nolesrule » Wed Oct 30, 2019 7:38 am

The math is correct IF:
1. The 10k is indeed the profit, after expenses
2. You will not exceed the Social Security Wage base.

To get accurate numbers, you'll need to know your SS wages from your W-2 job, complete Schedule C, Schedule SE and use the worksheet in Chapter 5 of Publication 560 ( current version is 2018, so adjusted for 2019 limits).

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

Re: Solo401k Contributions

Post by Spirit Rider » Wed Oct 30, 2019 8:56 am

You can use Mike Piper's Oblivious Investor's Solo 401(k) Contribution Calculator

It is the only simplified online calculator that will accurately calculate your circumstances. It takes into account your primary W-2 SS wages and employee deferrals.

fyre4ce
Posts: 351
Joined: Sun Aug 06, 2017 11:29 am

Re: Solo401k Contributions

Post by fyre4ce » Wed Oct 30, 2019 11:09 am

My understanding isn't quite matching the Mike Piper calculator. Example:

Assume $30,000 net business earnings (revenue minus deductible expenses). SE tax is $4,238.87, and half SE tax is $2,119.43. So, net business earnings minus 1/2 SE tax is $27,880.57.

I thought you are allowed to contribute $19,000 + 20% x $27,880.57 = $24,576.11.

The Mike Piper calculator says the maximum contribution is $19,000 + $4,440.28 = $23,440.28.

I'm not sure where the difference is. Does anyone know which is correct?

ivk5
Posts: 980
Joined: Thu Sep 22, 2016 9:05 am

Re: Solo401k Contributions

Post by ivk5 » Wed Oct 30, 2019 11:25 am

fyre4ce wrote:
Wed Oct 30, 2019 11:09 am
My understanding isn't quite matching the Mike Piper calculator. Example:

Assume $30,000 net business earnings (revenue minus deductible expenses). SE tax is $4,238.87, and half SE tax is $2,119.43. So, net business earnings minus 1/2 SE tax is $27,880.57.

I thought you are allowed to contribute $19,000 + 20% x $27,880.57 = $24,576.11.

The Mike Piper calculator says the maximum contribution is $19,000 + $4,440.28 = $23,440.28.

I'm not sure where the difference is. Does anyone know which is correct?
His page includes this:
The employer contribution is limited to half of the difference between your net earnings from self-employment and the employee contribution.
27881 - 19000 = 8881. Half is 4440.

Spirit Rider
Posts: 11868
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo401k Contributions

Post by Spirit Rider » Wed Oct 30, 2019 2:04 pm

This is correct.

There are two parts to the annual addition limit:
  • Statutory limit 2019 = $56K.
  • 100% of compensation limit.
Employer contributions are not compensation. They reduce the second annual addition limit and reduce the remaining available contribution space.

The maximum employer contribution is the lesser of $56K - employee deferral or (self-employed earned income (business profit - 1/2 SE tax) - employee deferral) / 2.

See IRS publication 560, worksheet for the self-employed, lines 9 - 13.

fyre4ce
Posts: 351
Joined: Sun Aug 06, 2017 11:29 am

Re: Solo401k Contributions

Post by fyre4ce » Wed Oct 30, 2019 2:24 pm

OK, got it, thanks!

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