4 ROTH Solo 401(k) Questions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Messner8000
Posts: 146
Joined: Sun May 21, 2017 8:03 am

4 ROTH Solo 401(k) Questions

Post by Messner8000 »

Hi Everyone -

I'm trying to set up a solo ROTH 401(k) for my wife's sole proprietorship and trying to do it DIY - through Vanguard (since our other accounts are with them). I have researched a few questions but find it hard to feel confident in the answers, and so I thought I'd confirm via BH! Also, if others have hired CPAs or other pros to do this type of stuff, please tell me. I'm wondering if I'm being foolish trying to do this myself!

(1) As a sole proprietor my wife can make an ER and EE-side contribution. Am I right that her contribution can be to a ROTH solo 401(k), but her "employer"-side contribution will have to be to a non-ROTH solo 401(k). In other words, I'll have to set up two accounts.

(2) Are there rules about whether the money that goes into a 401k comes from? For example, let's say my wife earns $50.000 in a year that gets deposited in a separate business account, but over the course of the year we move some of it to a non-business account to pay bills with the money, etc. The end of the year rolls around and we want to make a $10,000 ER-side contribution (the 20% max). Can I make it from our personal checking account? Or are there rules about keeping money segregated so the IRS (for example) could trace any deposits from a business account? Or is it enough that I could show she made $50,000, and we deposited $10,000?

(3) Am I right that the ER-side contribution is still subject to Social Security and Medicare taxes?

(4) How do folks determine the max. ER contribution? I've read it is 20% of your schedule C income. But I generally don't know that figure until I do taxes I don't think. This is where I could see a CPA coming in handy...but how do folks do it who do it themselves? Since I think you have until April 15 to make the ER-side contribution, do folks do their taxes, figure out the amount, and make the contribution then?

Thanks!
User avatar
Duckie
Posts: 8884
Joined: Thu Mar 08, 2007 2:55 pm

Re: 4 ROTH Solo 401(k) Questions

Post by Duckie »

Messner8000 wrote: Fri Aug 05, 2022 4:15 pm (1) As a sole proprietor my wife can make an ER and EE-side contribution. Am I right that her contribution can be to a ROTH solo 401(k), but her "employer"-side contribution will have to be to a non-ROTH solo 401(k). In other words, I'll have to set up two accounts.
Yes, she will need to set up both a pre-tax (traditional) and a Roth account (or maybe sub-account).
(2) Are there rules about whether the money that goes into a 401k comes from?
She can make it from the personal account. It's enough that she can show what she earned. But it will be easier for her bookkeeping if everything business is handled in one separate account.
(3) Am I right that the ER-side contribution is still subject to Social Security and Medicare taxes?
Her income is subject to Social Security up to the $147,000 limit and to Medicare with no limit. That is owed no matter her retirement contributions.
(4) How do folks determine the max. ER contribution? I've read it is 20% of your schedule C income. But I generally don't know that figure until I do taxes I don't think.
For sole-proprietors it is a max of 20% of net income (from Schedule C) minus 1/2 the self-employment taxes (from Schedule SE). Many people make the employEE contributions periodically (if not also contributing through a W-2 job) and then make the employER contributions in January or February once the total income is known.
Topic Author
Messner8000
Posts: 146
Joined: Sun May 21, 2017 8:03 am

Re: 4 ROTH Solo 401(k) Questions

Post by Messner8000 »

Thanks, Duckie!
KlangFool
Posts: 25819
Joined: Sat Oct 11, 2008 12:35 pm

Re: 4 ROTH Solo 401(k) Questions

Post by KlangFool »

OP,

I think when you setup Solo 401K with Vanguard, you get 3 accounts automatically.

1) Employer Trad 401K account.

2) Employee Trad 401K account

3) Employee Roth 401K account

Then, it is up to you to decide how much to contribute to each account each year. Usually, it is a mistake to contribute to Roth 401K. Please calculate carefully before you contribute to Roth 401K.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Post Reply