Any reason to use employer 401k vs. Individual 401k?

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marstaton4
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Joined: Wed Sep 15, 2010 11:52 am

Any reason to use employer 401k vs. Individual 401k?

Post by marstaton4 » Fri Jan 12, 2018 12:42 pm

I've got a fairly unique employment situation and I'm sort of a contractor in the sense that I work on a freelance basis with several employers but I'm paid W2 for my wages but get a significant amount of 1099 income as well for equipment rental and sales. My 401k plans at the employers are pretty good but not as good as my Individual 401k at Schwab. Is there any reason not to frontload my i401k at Schwab at the beginning of the year instead of having the money taken out of my W2 paychecks? The match isn't affected.

RRAAYY3
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Re: Any reason to use employer 401k vs. Individual 401k?

Post by RRAAYY3 » Fri Jan 12, 2018 1:08 pm

Can you have an individual 401K if you choose not to enter one provided by your full time employer?

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whodidntante
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Re: Any reason to use employer 401k vs. Individual 401k?

Post by whodidntante » Fri Jan 12, 2018 1:14 pm

Your employer's 401k might have features that make it worthwhile like employer match, loan provisions, and access to institutional share classes or investments that normally require an advisor like DFA funds.

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whodidntante
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Re: Any reason to use employer 401k vs. Individual 401k?

Post by whodidntante » Fri Jan 12, 2018 1:15 pm

RRAAYY3 wrote:
Fri Jan 12, 2018 1:08 pm
Can you have an individual 401K if you choose not to enter one provided by your full time employer?
If you have business and w2 income like the OP then you can do one or the other or both, subject to IRS limits

Spirit Rider
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Re: Any reason to use employer 401k vs. Individual 401k?

Post by Spirit Rider » Fri Jan 12, 2018 2:24 pm

It depends on what you mean by front load. Unlike an IRA, you can not make lump sum contributions to a one-participant 401k until you have the compensation available.

Employee elective deferrals can only be up to 100% of compensation not already received. If your tax status is that of an S-Corp, your deferrals must be deducted from your W-2 payroll after mandatory deductions (income taxes, FICA, etc...) and will be less than 100%. If your tax status is that of a sole proprietor it can be the full 100% of compensation. Net self-employment earnings = business profit - 1/2 SE tax.

Employer contributions can be up to 25% of compensation, but annual additions (employee + employer) can not be > 100% of compensation. As cash basis taxpayer, this can only be after constructive receipt of business income that the net self-employment earnings are based on.

In your particular case be aware that net self-employment earnings are only based on 100% of revenue from service income. If capital is a material income-producing factor you are subject to more stringent rules.

See 26 CFR 1.401-10 Definitions relating to plans covering self-employed individuals, (c) Definition of earned income, (3) Compensation for personal services actually rendered. You may only be able to base any one-participant 401k contributions on maybe 30% of the equipment rental income and sales.

marstaton4
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Joined: Wed Sep 15, 2010 11:52 am

Re: Any reason to use employer 401k vs. Individual 401k?

Post by marstaton4 » Fri Jan 12, 2018 4:18 pm

Spirit Rider wrote:
Fri Jan 12, 2018 2:24 pm
It depends on what you mean by front load. Unlike an IRA, you can not make lump sum contributions to a one-participant 401k until you have the compensation available.
Thanks for the detailed response and clarification. I was specifically making reference to the employee contribution and my tax status is a sole proprietor. I appreciate the help!

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