Hoping someone a lot smarter than me can help me "run the numbers"
Have a main W-2 job. 39.6% tax bracket. I max the employee 401k contribution and do a backdoor Roth.
Have a little 1099 income (< $10,000). Theoretically, I can deduct this down to nearly $0 with business expenses.
Do I come out ahead if I just deduct away the 1099 income? Or is it better to show a net profit in order to contribute (albeit a small amount) to a solo 401k, even though I expose myself to more income/payroll tax in order to do the solo 401k?
Is there a certain level of 1099 income at which a solo 401k clearly makes sense?
Thanks for your time.
1099 income - enough to open a solo 401k?
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Re: 1099 income - enough to open a solo 401k?
for us primary salaried W2 folks, I've heard it makes sense to open a solo 401k so that if we ever change jobs, we can roll our 403b or 401k's into the solo 401k (ie at Fidelity) and keep our IRA space clear for backdoor Roth contributions. There are some other supposed advantages too but I'd be interested to hear what other BH'ers think.
Re: 1099 income - enough to open a solo 401k?
If you can deduct down to zero income I don't see the benefit of a solo 401k.
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Re: 1099 income - enough to open a solo 401k?
There is actual IRS guidance that you are obligated to take legitimate business expenses. However, there are many sections of the tax code where there is room for interpretation.
It is always better to have no taxes on the income and make taxable investments than it is to pay self-employment taxes and be able to deduct 20% of the income.
If you have pre-tax IRA assets and no workplace retirement plan to roll them into to enable the Backdoor Roth. That might make sense.
What is it you are trying to do?
It is always better to have no taxes on the income and make taxable investments than it is to pay self-employment taxes and be able to deduct 20% of the income.
If you have pre-tax IRA assets and no workplace retirement plan to roll them into to enable the Backdoor Roth. That might make sense.
What is it you are trying to do?
Re: 1099 income - enough to open a solo 401k?
I guess I am trying to balance my goals of 1. maximizing tax-advantaged space and 2. reducing my total tax liability. Even as I write this, I am starting to see that if I have enough deductions to just cancel out the 1099 income, that is better than not taking those deductions just to do solo 401k contributions.
I don't have any pre-tax IRAs hanging around.
I don't have any pre-tax IRAs hanging around.
Re: 1099 income - enough to open a solo 401k?
Those business deductions are saving you at least (39.6% + 2.9% + whatever state tax marginal rate), and maybe more due to phase-outs.
That's a pretty good tax advantage, so take advantage of them.
That's a pretty good tax advantage, so take advantage of them.