Solo 401k for part-time gig

[MrBeaver]

Just wanted to check my understanding and plan with the hive mind.

Relavent info:
MFJ, 22% marginal tax bracket
Max his 401k
Max his Roth IRA
Max her Spousal IRA / Roth IRA (to stay at the top of 0% LTCG bracket)
Company stock that needs to be diversified: ~80k NQSO expire in 2025-2027, ~60k in old ESPP/RSU shares before I started selling ASAP with ~25% (15k) gain

Wife is starting a part-time gig from home (not real-estate), with no employees and anticipated annual income of 15k-25k. Our plan is:

1. Open a solo 401k through Fidelity
2. Deposit as much income as possible: This should be up to 22,500 for personal contribution (after paying payroll / self employment tax), and up to 25% of total profit as a contribution from the business. I anticipate this income limit of around $22,500 + $6,050 employer + 2184 SEP tax = $30,7355 is higher than the business will make, and therefore contributing the maximum to a solo 401k would have zero net income falling through at the end of the Schedule C.
3. Withdrawal enough from company stock holdings for other budget needs or to move to other investments (less than from business income), paying income tax or LTCG on those proceeds.
4. Use only Roth IRA for her, as spousal traditional IRA would be disallowed because she is eligible for the solo 401k. However, I'm not sure whether she must show net income in order to contribute to a Roth IRA (still need to do some digging)

Any issues with this plan? The concept is essentially to use a Solo 401k and the presence of a sole proprietor business to move money from company stock holdings into a diversified tax-differed vehicle exceeding the current spousal IRA limit.

[livesoft]

I have done something similar for a long time. A couple of nitpicks:

Individual 401(k) contributions do not appear on Schedule C, so there will still be net income on Schedule C.

One doesn't need earned income to make Roth contributions if one's spouse has earned income to do that.

[HomeStretch]

Wife is starting a part-time gig from home (not real-estate), with no employees and anticipated annual income of 15k-$25k…

… Deposit as much income as possible: This should be up to 22,500 for personal contribution (after paying payroll / self employment tax), and up to 25% of total profit as a contribution from the business. I anticipate this income limit of around $22,500 + $6,050 employer + 2184 SEP tax = $30,7355 is higher than the business will make, and therefore contributing the maximum to a solo 401k would have zero net income falling through at the end of the Schedule C. …

A Solo 401k is a good choice for a self-employed retirement plan.

The combined Solo 401k employEE and employER contributions cannot exceed your spouse’s net earnings from self-employment (see IRS Publication 560, Chapter 5 worksheets/tables). If your spouse’s net s/e earnings are the $25k max in your example, your spouse could not make the contributions in your example of $28,550 ($22,500 employEE and $6,050 employER).

The Oblivious Investor has a good Solo 401k contribution calculator here:
https://obliviousinvestor.com/solo-401k ... alculator/

Read up on the Form 5500-EZ filing requirements per the IRS Form Instructions here:
https://www.irs.gov/pub/irs-pdf/i5500ez.pdf

[aristotelian]

Plan sounds good to me.

[MrBeaver]

(see IRS Publication 560, Chapter 5 worksheets/tables). If your spouse’s net s/e earnings are the $25k max in your example, your spouse could not make the contributions in your example of $28,550 ($22,500 employEE and $6,050 employER).

Thank you, very helpful. I was not aware of the 50% difference between employee net income and employee 401k contribution limitation. As such, it sounds like 100% contribution is possible up to net income (after SEP tax is paid) of the 401k individual contribution limit. Between there and the total limit (66k currently), the contribution max is essentially 50% and then 25% (once employer contribution reaches 25% of net income).

In our case, the 22,500 limit will likely be high enough that no additional net income is present at least for the first year. But good to know about future thresholds and steps.

[robphoto]

Not sure what is optimal in your case, but you can have both Roth and Traditional Solo 401K

[mw1739]

+1 to the Oblivious Investor calculator

[PaddyMac]

We've been self-employed for decades and have 401k for our business at Vanguard (which has a Roth 401k option).

Track your income through dummy tax form and you will see that your wife will still be paying SE Tax of 15.3% on her Schedule C income.
When you have low income like $15-25K, the 401k contributions max out so that you can't actually save 100% of income.
Fidelity has a good PDF worksheet, you can build it as a spreadsheet and make it interactive:
https://www.fidelity.com/bin-public/060 ... siness.pdf

This is also a great resource:
https://sheet.zohopublic.com/sheet/publ ... 140934898a

But yes, through some quirk of the tax rules, you can save the SAME $6,500 in both the 401k and the Roth IRA!