A solo 401k is my new year's resolution (tax advice needed)

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
User avatar
Topic Author
whodidntante
Posts: 7150
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

A solo 401k is my new year's resolution (tax advice needed)

Post by whodidntante » Sun Jan 01, 2017 1:42 pm

In 2017 I would like to setup a solo 401(k) and rollover a traditional (former rollover) IRA into it, to enable a backdoor Roth going forward. My problem is that I am a working stiff, and I had zero self-employment income last year. I do have lucrative skills, but I am not interested in building a small business at this time. I earn a good income, travel frequently, and I am working on a master's degree, so a "real" business just isn't practical right now.

If I earn a legitimate but small amount of income as a sole proprietor, and then setup a solo 401(k), does that run counter to tax code or case law? Will the IRS squash me like a bug? Is there a certain amount of self-employment income that I should earn to avoid trouble? E.g.:

$500
$5,000
$50,000

User avatar
Duckie
Posts: 7005
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by Duckie » Sun Jan 01, 2017 6:24 pm

whodidntante wrote:If I earn a legitimate but small amount of income as a sole proprietor, and then setup a solo 401(k), does that run counter to tax code or case law?
No, as long as it's legitimate.
Will the IRS squash me like a bug?
No.
Is there a certain amount of self-employment income that I should earn to avoid trouble? E.g.:

$500
$5,000
$50,000
$500 is probably enough, but just to avoid suspicion I'd say anything between $2000 and $5000.

monsterid
Posts: 132
Joined: Sat Dec 31, 2016 7:10 pm

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by monsterid » Sun Jan 01, 2017 6:51 pm

Yes but remember your contributions are capped by the self-employment income.

e.g. you can't only have $500 of self employment income and $200k for W2 income and then contribute $53k into the solo 401k.

Least that is my current understanding...

User avatar
Duckie
Posts: 7005
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by Duckie » Sun Jan 01, 2017 8:00 pm

monsterid wrote:Yes but remember your contributions are capped by the self-employment income.

e.g. you can't only have $500 of self employment income and $200k for W2 income and then contribute $53k into the solo 401k.
True, but his primary purpose of opening the solo 401k is to "hide" a rollover IRA so he can use the Backdoor Roth IRA method.

User avatar
Topic Author
whodidntante
Posts: 7150
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by whodidntante » Sun Jan 01, 2017 8:34 pm

Thanks Duckie. I'll come up with a way to earn a couple grand from self employment this year.

billfromct
Posts: 1034
Joined: Tue Dec 03, 2013 9:05 am

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by billfromct » Sun Jan 01, 2017 9:37 pm

Don't forget that you have to pay self employment tax (the employer & employee SS and Medicare tax which is about 15.3%) on any self employment earnings. Check " the Google".

Also you need to check to make sure your Solo 401k provider accepts IRA rollovers.

You can also set up a Roth Solo 401k. My daughter set up a Roth Solo 401k with Vanguard a couple years ago.

I think Fidelity does not offer a Roth Solo 401k, but you should check with Fidelity.

bill

DSInvestor
Posts: 11068
Joined: Sat Oct 04, 2008 11:42 am

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by DSInvestor » Sun Jan 01, 2017 9:43 pm

Have you checked if your employer plan allows inbound rollovers from IRA? If it allows rollovers and has low cost investment options, you may not need to use solo 401k at all.

You still have time to contribute to Traditional IRA for tax year 2016 (deadline is APR 18, 2016). Contribute $5500 for 2016, $5500 for 2017, convert 11K to Roth IRA, then make sure you rollover all remaining assets in Rollover IRA, Traditional IRA to 401k or solo 401k by Dec 31, 2017.
Wiki

monsterid
Posts: 132
Joined: Sat Dec 31, 2016 7:10 pm

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by monsterid » Sun Jan 01, 2017 11:26 pm

Duckie wrote:
monsterid wrote:Yes but remember your contributions are capped by the self-employment income.

e.g. you can't only have $500 of self employment income and $200k for W2 income and then contribute $53k into the solo 401k.
True, but his primary purpose of opening the solo 401k is to "hide" a rollover IRA so he can use the Backdoor Roth IRA method.
True, and I have one as well. Just make sure the contribution and rollover amounts are meaningful vs any costs (e.g. to est. a custom one via my401k etc)

User avatar
Topic Author
whodidntante
Posts: 7150
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by whodidntante » Mon Jan 02, 2017 12:08 am

DSInvestor wrote:Have you checked if your employer plan allows inbound rollovers from IRA? If it allows rollovers and has low cost investment options, you may not need to use solo 401k at all.

You still have time to contribute to Traditional IRA for tax year 2016 (deadline is APR 18, 2016). Contribute $5500 for 2016, $5500 for 2017, convert 11K to Roth IRA, then make sure you rollover all remaining assets in Rollover IRA, Traditional IRA to 401k or solo 401k by Dec 31, 2017.
My employer's 401(k) does allow incoming rollovers, and that's plan B as it were. However, the plan is a boat anchor and I don't want to feed it my rollover.

I have fully funded my IRA for 2016. I've been flirting with the Roth MAGI limits for years, and I have finally reached the level where no amount of maneuvering will leave me under the limit.
Last edited by whodidntante on Mon Jan 02, 2017 12:16 am, edited 1 time in total.

User avatar
Topic Author
whodidntante
Posts: 7150
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by whodidntante » Mon Jan 02, 2017 12:12 am

billfromct wrote:Don't forget that you have to pay self employment tax (the employer & employee SS and Medicare tax which is about 15.3%) on any self employment earnings. Check " the Google".

Also you need to check to make sure your Solo 401k provider accepts IRA rollovers.

You can also set up a Roth Solo 401k. My daughter set up a Roth Solo 401k with Vanguard a couple years ago.

I think Fidelity does not offer a Roth Solo 401k, but you should check with Fidelity.

bill
Thanks. I'm aware of self-employment tax. I've worked for myself before, but it's been over a decade. I've confirmed that I can setup a Fidelity solo 401(k) to accept incoming rollovers. I strongly prefer pre-tax contributions to a Roth at my current marginal rate.

User avatar
Topic Author
whodidntante
Posts: 7150
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by whodidntante » Mon Jan 02, 2017 12:14 am

monsterid wrote:
Duckie wrote:
monsterid wrote:Yes but remember your contributions are capped by the self-employment income.

e.g. you can't only have $500 of self employment income and $200k for W2 income and then contribute $53k into the solo 401k.
True, but his primary purpose of opening the solo 401k is to "hide" a rollover IRA so he can use the Backdoor Roth IRA method.
True, and I have one as well. Just make sure the contribution and rollover amounts are meaningful vs any costs (e.g. to est. a custom one via my401k etc)
Fidelity's costs seem reasonable. Basically it's trading costs, and I don't expect to incur those for what I will buy.

DSInvestor
Posts: 11068
Joined: Sat Oct 04, 2008 11:42 am

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by DSInvestor » Mon Jan 02, 2017 12:30 am

whodidntante wrote:
billfromct wrote:Don't forget that you have to pay self employment tax (the employer & employee SS and Medicare tax which is about 15.3%) on any self employment earnings. Check " the Google".

Also you need to check to make sure your Solo 401k provider accepts IRA rollovers.

You can also set up a Roth Solo 401k. My daughter set up a Roth Solo 401k with Vanguard a couple years ago.

I think Fidelity does not offer a Roth Solo 401k, but you should check with Fidelity.

bill
Thanks. I'm aware of self-employment tax. I've worked for myself before, but it's been over a decade. I've confirmed that I can setup a Fidelity solo 401(k) to accept incoming rollovers. I strongly prefer pre-tax contributions to a Roth at my current marginal rate.
If OP's income as a W-2 employee is such that Roth IRA contributions are not permitted, it is likely that the social security max has already been reached. In this situation, schedule C income will only be subject to medicare tax which is 2.9%. Schedule SE takes social security wages from W-2 into consideration when calculating self employment tax.
Wiki

DSInvestor
Posts: 11068
Joined: Sat Oct 04, 2008 11:42 am

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by DSInvestor » Mon Jan 02, 2017 12:32 am

whodidntante wrote:
DSInvestor wrote:Have you checked if your employer plan allows inbound rollovers from IRA? If it allows rollovers and has low cost investment options, you may not need to use solo 401k at all.

You still have time to contribute to Traditional IRA for tax year 2016 (deadline is APR 18, 2016). Contribute $5500 for 2016, $5500 for 2017, convert 11K to Roth IRA, then make sure you rollover all remaining assets in Rollover IRA, Traditional IRA to 401k or solo 401k by Dec 31, 2017.
My employer's 401(k) does allow incoming rollovers, and that's plan B as it were. However, the plan is a boat anchor and I don't want to feed it my rollover.
Right, if you have a large rollover IRA it would not make sense to transfer into a high cost 401k plan. e.g. 200K rollover into a high cost 401k costing 1.5% would be $3000/yr in expense ratio - too much to pay to use backdoor into Roth IRA for $5500/yr. A fidelity solo 401k would be a much better way to go if you can find a way to earn some self employed income.
Wiki

User avatar
Topic Author
whodidntante
Posts: 7150
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: A solo 401k is my new year's resolution (tax advice needed)

Post by whodidntante » Mon Jan 02, 2017 12:35 am

DSInvestor wrote:
whodidntante wrote:
billfromct wrote:Don't forget that you have to pay self employment tax (the employer & employee SS and Medicare tax which is about 15.3%) on any self employment earnings. Check " the Google".

Also you need to check to make sure your Solo 401k provider accepts IRA rollovers.

You can also set up a Roth Solo 401k. My daughter set up a Roth Solo 401k with Vanguard a couple years ago.

I think Fidelity does not offer a Roth Solo 401k, but you should check with Fidelity.

bill
Thanks. I'm aware of self-employment tax. I've worked for myself before, but it's been over a decade. I've confirmed that I can setup a Fidelity solo 401(k) to accept incoming rollovers. I strongly prefer pre-tax contributions to a Roth at my current marginal rate.
If OP's income as a W-2 employee is such that Roth IRA contributions are not permitted, it is likely that the social security max has already been reached. In this situation, schedule C income will only be subject to medicare tax which is 2.9%. Schedule SE takes social security wages from W-2 into consideration when calculating self employment tax.
Yes, I max social security taxes each year.

Post Reply