Solo 401K - Help needed

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mt2k
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Solo 401K - Help needed

Post by mt2k »

I have always been a W2 employee but now I have accepted a new job offer as 1099 Independent Contractor. I intend to continue working on 1099 at least till the end 2023, may be in 2024 as well.
From my Previous W2 employer, I have already put $16K into employer provided 401K and had plan to max out but now the change in job.

Need help in deciding whether to go with traditional or Roth Solo 401K..
Annual Revenue to my LLC is expected to be around of $210K. Out of which around $90K will be my salary from which I'll max out the employee portion of 401K contribution.
I'll be deducting some business expenses, my healthcare insurance premium etc.. so remaining Profit in the LLC will be around $100K. So I am planning for around $25K contribution into 401K as Employer contribution.
Keeping in mind the QBI deductions would you suggest to with traditional or roth?

Just to note that this is my only source of income (may be few thousands in dividends/capital gain etc..) and my filing status is Married Filing Jointly.

I have not decided the provider yet but based on my research I cannot go wrong with any of Fidelity, Vanguard, Schwab, TDAmeritrade or eTrade.I have no intention of doing a rollover into my Solo 401K.
Last edited by mt2k on Thu Sep 22, 2022 12:17 pm, edited 1 time in total.
livesoft
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Re: Solo 401K - Help needed

Post by livesoft »

Go with the traditional solo 401(k) at first. You may find it difficult to find a custodian that will support an individual Roth 401(k).
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Katietsu
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Re: Solo 401K - Help needed

Post by Katietsu »

I am confused by your discussion of salary and remaining profit. Are you setting up an S Corp? And with a single person performing a previous W-2 job S Corp, attributing more to profit than salary is outside the default. Not saying that it is incorrect.

Several of the brokerages that you listed will allow the Roth option. I believe Whitecoatinvestor has some good illustrations about the best choices for situations similar to yours.
HomeStretch
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Re: Solo 401K - Help needed

Post by HomeStretch »

mt2k wrote: Wed Sep 21, 2022 3:54 pm … Need help in deciding whether to go with traditional or Roth Solo 401k. …

… I have not decided the provider yet but based on my research I cannot go wrong with any of Fidelity, Vanguard, Schwab, TDAmeritrade or eTrade. …
The BH wiki page “Traditional v Roth” may be helpful in making your decision:
https://www.bogleheads.org/wiki/Traditional_versus_Roth

Not all no/low-cost prototype Solo 401k providers offer a Roth option so be sure to check whether this feature is offered as part of your provider selection. Vanguard and E-Trade offer a Roth option. Fidelity does not. Not sure but Schwab and TD Ameritrade may not offer a Roth option or may be phasing it out due to business combinations.
Annual Revenue to my LLC is expected to be around of $210K. Out of which around $90K will be my salary from which I'll max out the employee portion of 401K contribution.
If you will be paying yourself a salary, sounds like you will elect S-Corp status for Federal tax purposes. If yes, you will need to pay yourself and make 401k employEE elective deferrals through payroll. There are low-cost payroll providers - search on past forum threads.
I'll be deducting some business expenses, my healthcare insurance premium etc.. so remaining Profit in the LLC will be around $100K. So I am planning for around $25K contribution into 401K as Employer contribution.
The self-employed healthcare insurance premiums are usually deducted on your personal Form 1040 and not on your business return. So that deduction may not reduce your business profits for purposes of calculating the 401k employER contribution. Edit - now that you have confirmed it is an S-Corp, it makes sense you are showing it as a business deduction.

If your LLC’s net business earnings are $100k, your maximum employER contribution will be <$20k. You reduce your net business earnings by the employER share of self-employment taxes and multiply the remainder by 20%.
There are internet calculators (not all are 100% accurate. I think the Oblivious Investor website has one that has been recommended in past threads.
I have intention of doing a rollover into my Solo 401K.
If you will be doing a significant rollover into the Solo 401k, keep in mind the Form 5500-EZ annual filing requirement if the plan’s assets are $250k+ on December 31. Consider reading the IRS Form 5500-EZ instructions found here: https://www.irs.gov/pub/irs-pdf/i5500ez.pdf as part of your plan set up. There are significant penalties for late filings or failing to file. There are quite a few past forum threads on this.
Last edited by HomeStretch on Thu Sep 22, 2022 12:23 pm, edited 1 time in total.
Topic Author
mt2k
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Re: Solo 401K - Help needed

Post by mt2k »

Katietsu wrote: Wed Sep 21, 2022 5:22 pm I am confused by your discussion of salary and remaining profit. Are you setting up an S Corp? And with a single person performing a previous W-2 job S Corp, attributing more to profit than salary is outside the default. Not saying that it is incorrect.

Several of the brokerages that you listed will allow the Roth option. I believe Whitecoatinvestor has some good illustrations about the best choices for situations similar to yours.
That is correct. It's a Single-member LLC and elected to be taxed as S corporations. One of the reason to do so is to save on Payroll taxes.
Topic Author
mt2k
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Re: Solo 401K - Help needed

Post by mt2k »

@HomeStretch Thanks a lot for the detailed guidance. Very helpful.
HomeStretch wrote: Wed Sep 21, 2022 5:39 pm The BH wiki page “Traditional v Roth” may be helpful in making your decision:
https://www.bogleheads.org/wiki/Traditional_versus_Roth

Not all no/low-cost prototype Solo 401k providers offer a Roth option so be sure to check whether this feature is offered as part of your provider selection. Vanguard and E-Trade offer a Roth option. Fidelity does not. Not sure but Schwab and TD Ameritrade may not offer a Roth option or may be phasing it out due to business combinations.
Thank you. I'll do that. I like Fidelity and will go with it if I opt for pre-tax option.
If you will be paying yourself a salary, sounds like you will elect S-Corp status for Federal tax purposes. If yes, you will need to pay yourself and make 401k employEE elective deferrals through payroll. There are low-cost payroll providers - search on past forum threads.
That's correct.
The self-employed healthcare insurance premiums are usually deducted on your personal Form 1040 and not on your business return. So that deduction may not reduce your business profits for purposes of calculating the 401k employER contribution.

If your LLC’s net business earnings are $100k, your maximum employER contribution will be <$20k. You reduce your net business earnings by the employER share of self-employment taxes and multiply the remainder by 20%.
There are internet calculators (not all are 100% accurate. I think the Oblivious Investor website has one that has been recommended in past threads.
Thank you. I was not aware of it.
If you will be doing a significant rollover into the Solo 401k, keep in mind the Form 5500-EZ annual filing requirement if the plan’s assets are $250k+ on December 31. Consider reading the IRS Form 5500-EZ instructions found here: https://www.irs.gov/pub/irs-pdf/i5500ez.pdf as part of your plan set up. There are significant penalties for late filings or failing to file. There are quite a few past forum threads on this.
Made a correction to my original post. I intended to say, I have NO intention of doing a rollover into my Solo 401K.
HomeStretch
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Re: Solo 401K - Help needed

Post by HomeStretch »

I edited my response, above, after you confirmed it was an S-Corp, to say insurance premiums are a business deduction for an S-Corp.

Mike Piper’s Oblivious Investor’s calculator says it is not intended for S-Corps.
namenloseblonde
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Re: Solo 401K - Help needed

Post by namenloseblonde »

I recently called Vanguard to reactivate my dormant Solo 401K (I opened it years ago but never contributed) and they advised me to add the Roth option - no extra charge or seemingly any other drawbacks to having it available.
Joey Jo Jo Jr
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Re: Solo 401K - Help needed

Post by Joey Jo Jo Jr »

With S corp is 401k contribution deemed only from the W-2 or pro rata as to that and the pass through income? I’m thinking that QBI will be less relevant here if not completely irrelevant (assuming you aren’t already disqualified based on the QBI phase outs).

My wife is going through this exact thing right now and I’m planning to just go with a schedule C LLC and a Roth 401k while I continue to max traditional 401k.
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MP123
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Re: Solo 401K - Help needed

Post by MP123 »

HomeStretch wrote: Thu Sep 22, 2022 12:36 pm I edited my response, above, after you confirmed it was an S-Corp, to say insurance premiums are a business deduction for an S-Corp.

Mike Piper’s Oblivious Investor’s calculator says it is not intended for S-Corps.
Just to expand on this a bit, the health insurance premiums are properly included in the S-Corp owner/employee's compensation on W-2. This makes them a deduction for the business (Officers compensation on 1120S), but also increases the amount of compensation for the owner that serves as the basis for the 25% employER contribution. It also reduces the amount of passthough K-1 income from the business because of the 1120S deduction.

This is helpful because for an S-Corp the contribution limits are based on W-2 compensation, not business income.

Of course including the premiums on W-2 increases the owner's taxable compensation, but on 1040 the S-Corp owner/employee finally gets to take the self employed health insurance deduction (if they are eligible).

Deducting S-Corp health insurance premiums is a complex shell game.
Topic Author
mt2k
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Re: Solo 401K - Help needed

Post by mt2k »

Thank you all for your responses
Topic Author
mt2k
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Solo 401K Contribution Limit

Post by mt2k »

[Thread merged into here --admin LadyGeek]

I have a Single Member LLC and elected to be taxed as an S-Corp.
I am confused on the employER contribution between the 20% on net profit v/s 25% of W2-salary.

Here is a hypothetical scenario:
SMLLC Total Revenue: $230K
Salary to Self: $100K
Business expenses including payroll taxes etc: $40K
Net Profit without considering 401K employER contribution=$230K-$100K-$40K = $90K

In this scenario, please help me answer the following:
1. I as an employee can contribute a max of $20,500 pre-tax into my Solo 401K. Correct?
2. How much can be max employER contribution? 25% of my salary (=25%x100K=$25K) or 20% of the net LLC Profit (=20% of $90K=$18K)?
3. How much will be the Net profit of the LCC passed through to me to be taxed?
4. Can I make the Employee contributions to my Solo 401K outside of the Payroll? (My payroll provider does not integrate with Fidelity Solo 401K)
5. Can I make the EmployER contributions to my Solo 401K outside of the Payroll?
6. If the answer to #4 and #5 is YES. W2 is prepared by the payroll company and they won't know about my Solo 401K contributions outside of payroll, how will I show them during Tax Filing?

Thank you for your help.
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MP123
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Re: Solo 401K Contribution Limit

Post by MP123 »

mt2k wrote: Mon Sep 26, 2022 11:08 am 1. I as an employee can contribute a max of $20,500 pre-tax into my Solo 401K. Correct?
2. How much can be max employER contribution? 25% of my salary (=25%x100K=$25K) or 20% of the net LLC Profit (=20% of $90K=$18K)?
3. How much will be the Net profit of the LCC passed through to me to be taxed?
4. Can I make the Employee contributions to my Solo 401K outside of the Payroll? (My payroll provider does not integrate with Fidelity Solo 401K)
5. Can I make the EmployER contributions to my Solo 401K outside of the Payroll?
6. If the answer to #4 and #5 is YES. W2 is prepared by the payroll company and they won't know about my Solo 401K contributions outside of payroll, how will I show them during Tax Filing?
Your employee deferral is a max of $20,500 with an additional $6500 if you are over 50.

Your employer contribution is based on 25% of your W-2 compensation, not the profit from the business.

In your example you would get a K-1 from the S-Corp reflecting $90k (less any employer contribution) in profit. Note that business income may be eligible for the 20% QBI Section 199a deduction so it can be complex to figure out the optimal payroll/profit ratio.

The employee deferral must go through payroll, this is because FICA taxes are due even though income tax is deferred.

The employer contribution is not subject to FICA and doesn't show on payroll, it's a business deduction on 1120S which will reduce your net profit and passthrough income (above).
pizzy
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Re: Solo 401K Contribution Limit

Post by pizzy »

$20,500 employee

$25,000 employer

$45,500 total
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Re: Solo 401K - Help needed

Post by LadyGeek »

mt2k - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread. If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to this thread.)
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Topic Author
mt2k
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Re: Solo 401K - Help needed

Post by mt2k »

LadyGeek wrote: Mon Sep 26, 2022 1:48 pm mt2k - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread. If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to this thread.)
Thank you LadyGeek. I created a separate post as the questions were but different but ofcourse they are related. So, thanks for merging them
Topic Author
mt2k
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Re: Solo 401K Contribution Limit

Post by mt2k »

MP123 wrote: Mon Sep 26, 2022 11:25 am
mt2k wrote: Mon Sep 26, 2022 11:08 am 1. I as an employee can contribute a max of $20,500 pre-tax into my Solo 401K. Correct?
2. How much can be max employER contribution? 25% of my salary (=25%x100K=$25K) or 20% of the net LLC Profit (=20% of $90K=$18K)?
3. How much will be the Net profit of the LCC passed through to me to be taxed?
4. Can I make the Employee contributions to my Solo 401K outside of the Payroll? (My payroll provider does not integrate with Fidelity Solo 401K)
5. Can I make the EmployER contributions to my Solo 401K outside of the Payroll?
6. If the answer to #4 and #5 is YES. W2 is prepared by the payroll company and they won't know about my Solo 401K contributions outside of payroll, how will I show them during Tax Filing?
Your employee deferral is a max of $20,500 with an additional $6500 if you are over 50.

Your employer contribution is based on 25% of your W-2 compensation, not the profit from the business.

In your example you would get a K-1 from the S-Corp reflecting $90k (less any employer contribution) in profit. Note that business income may be eligible for the 20% QBI Section 199a deduction so it can be complex to figure out the optimal payroll/profit ratio.

The employee deferral must go through payroll, this is because FICA taxes are due even though income tax is deferred.

The employer contribution is not subject to FICA and doesn't show on payroll, it's a business deduction on 1120S which will reduce your net profit and passthrough income (above).
Thank you so much much MP123 . Very helpful. Now I have to figure out how to contribute the employee deferral as my payroll is not connect to Fidelity Solo 401K.
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MP123
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Re: Solo 401K Contribution Limit

Post by MP123 »

mt2k wrote: Mon Sep 26, 2022 2:31 pm
MP123 wrote: Mon Sep 26, 2022 11:25 am
mt2k wrote: Mon Sep 26, 2022 11:08 am 1. I as an employee can contribute a max of $20,500 pre-tax into my Solo 401K. Correct?
2. How much can be max employER contribution? 25% of my salary (=25%x100K=$25K) or 20% of the net LLC Profit (=20% of $90K=$18K)?
3. How much will be the Net profit of the LCC passed through to me to be taxed?
4. Can I make the Employee contributions to my Solo 401K outside of the Payroll? (My payroll provider does not integrate with Fidelity Solo 401K)
5. Can I make the EmployER contributions to my Solo 401K outside of the Payroll?
6. If the answer to #4 and #5 is YES. W2 is prepared by the payroll company and they won't know about my Solo 401K contributions outside of payroll, how will I show them during Tax Filing?
Your employee deferral is a max of $20,500 with an additional $6500 if you are over 50.

Your employer contribution is based on 25% of your W-2 compensation, not the profit from the business.

In your example you would get a K-1 from the S-Corp reflecting $90k (less any employer contribution) in profit. Note that business income may be eligible for the 20% QBI Section 199a deduction so it can be complex to figure out the optimal payroll/profit ratio.

The employee deferral must go through payroll, this is because FICA taxes are due even though income tax is deferred.

The employer contribution is not subject to FICA and doesn't show on payroll, it's a business deduction on 1120S which will reduce your net profit and passthrough income (above).
Thank you so much much MP123 . Very helpful. Now I have to figure out how to contribute the employee deferral as my payroll is not connect to Fidelity Solo 401K.
This is payroll provider specific. If it's a big hassle you might consider giving yourself a one time yearly bonus and deferring it all rather than having to deal with monthly or weekly transfers.
Topic Author
mt2k
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Re: Solo 401K Contribution Limit

Post by mt2k »

MP123 wrote: Mon Sep 26, 2022 6:38 pm
mt2k wrote: Mon Sep 26, 2022 2:31 pm
MP123 wrote: Mon Sep 26, 2022 11:25 am
mt2k wrote: Mon Sep 26, 2022 11:08 am 1. I as an employee can contribute a max of $20,500 pre-tax into my Solo 401K. Correct?
2. How much can be max employER contribution? 25% of my salary (=25%x100K=$25K) or 20% of the net LLC Profit (=20% of $90K=$18K)?
3. How much will be the Net profit of the LCC passed through to me to be taxed?
4. Can I make the Employee contributions to my Solo 401K outside of the Payroll? (My payroll provider does not integrate with Fidelity Solo 401K)
5. Can I make the EmployER contributions to my Solo 401K outside of the Payroll?
6. If the answer to #4 and #5 is YES. W2 is prepared by the payroll company and they won't know about my Solo 401K contributions outside of payroll, how will I show them during Tax Filing?
Your employee deferral is a max of $20,500 with an additional $6500 if you are over 50.

Your employer contribution is based on 25% of your W-2 compensation, not the profit from the business.

In your example you would get a K-1 from the S-Corp reflecting $90k (less any employer contribution) in profit. Note that business income may be eligible for the 20% QBI Section 199a deduction so it can be complex to figure out the optimal payroll/profit ratio.

The employee deferral must go through payroll, this is because FICA taxes are due even though income tax is deferred.

The employer contribution is not subject to FICA and doesn't show on payroll, it's a business deduction on 1120S which will reduce your net profit and passthrough income (above).
Thank you so much much MP123 . Very helpful. Now I have to figure out how to contribute the employee deferral as my payroll is not connect to Fidelity Solo 401K.
This is payroll provider specific. If it's a big hassle you might consider giving yourself a one time yearly bonus and deferring it all rather than having to deal with monthly or weekly transfers.
Makes sense. I like the idea. Much less hassle.
fyre4ce
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Re: Solo 401K - Help needed

Post by fyre4ce »

Your plan is reasonable, but there's a lot of complexity under the surface in your situation.

S-corp vs. Sole Proprietor: An S-corp saves on payroll taxes, but it also reduces your QBI deduction compared to a sole prop. A sole prop pays payroll taxes on the entire business earnings, but also gets a QBI deduction on the entire business earnings. Which is more significant depends on a lot of factors, such as other income, whether you're a SSTB, your expected Social Security bracket (you're likely not in 90%, but you could be in either 32% or 15%) and whether you have a spouse who will be collecting benefits off your income. S-corps also require a separate tax return, which means you either have to pay an accountant a couple thousand dollars to prepare it, or do it yourself, which takes time. Same for running payroll, with a cost of hundreds of dollars per year. This doesn't apply to you, but if you have a separate W-2 job and your total wages are greater than the Social Security tax limit, an S-corp loses the excess employer Social Security tax whereas it gets refunded for a sole prop. My instinct is that an S-corp is the better choice for you, but it's not obvious, and if you like I can run an analysis for you.

Traditional vs. Roth contributions: Your original post seems to be mostly asking whether your Solo 401k contributions should be traditional (pre-tax) or Roth. This is a common question on the forums, and it can be quite complex to solve. There is a long wiki page about it. It's mostly about trying to predict your future tax situation, and choosing the option where you pay taxes at a lower rate. I created a software tool that analyzes this question. Feel free to check it out, and PM me if you need help.

Free vs. fancy solo 401k: The free Solo 401k options allow an employee elective deferral (some free plans allow this to be Roth), and also employer profit sharing contributions. If you pay extra (usually around $500 setup and $125/yr), you can get a plan that allows mega backdoor Roth contributions (and there's a section on that page dealing specifically with MBR in a solo 401k). The tax savings of the extra Roth money usually far outweighs the setup costs. The MBR-enabled solo 401k is NOT a good idea if: (a) you have a strong preference for traditional savings AND you have a high enough salary where you can hit the maximum without MBR, (b) you don't have the budget to support large MBR contributors, or (c) you don't want to deal with the extra complexity. (a) doesn't apply to you, but (b) or (c) might. With a MBR plan you'd be able to put away an extra $15,500/year into Roth accounts that would otherwise be invested in taxable.
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