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Need help with Solo 401k.

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  • Need help with Solo 401k.

    I am 1099, planning to max both employee and "employer" contributions to solo 401k this year.

     

    Couple questions:

    1. I have read multiple sources including WCI forum looking for minimum "reasonable salary" needed to max out employer contributions. My understanding is that the employer in his or her own solo 401k can contribute 25% of salary up to the 37k. Does this mean (37k x 4) = 148k is the minimum reasonable salary required to max out this portion of the 401k? What about the 19k of employee contributions? Can this be part of the 148k, or in addition (167k)?

     

    2. I have been reading into the mega back door for solo 401ks. I am trying to wrap my head around maxing contributions as above versus making after tax contributions then converting to my roth IRA. I anticipate we'll be in the 24% bracket over the next few years and like the idea of pumping roth money into the IRA early on (in addition to my BD Roth IRA). That said, is all that worth the hassle of having someone customize a solo 401k for me. Admittedly I haven't crunched any numbers on this, just hoping for some general advice. (if recommending pursuing solo 401k plan customized for mega back door, is mysolo401k still the go to?)

     

    Thanks,

    D

  • #2
    1099 setup as S corp or sole prop?

    spreadsheet from The Finance Buff linked in my signature allows you to input your income numbers and see the allowed contribution amounts, use the unincorporated tab for sole prop or the incorporated tab if S corp setup

    what is overall 1099 income, and assume you're married?

    "reasonable salary" is exactly what it sounds like. What would someone in your field, with your experience and expertise, in your area, be expected to be paid salary if employed? Simple as that.

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    • #3
      S corp in profession association (TX). Married.  I understand reasonable salary but my point is that it has to be at least X amount for me to contribute the max of 37k into solo 401k. Trying to figure out what that X amount is. Somewhere between 150 and 200k would be reasonable for me, but I want to make sure it isn't lower than what is need for max contributions.  Further more want to make sure it isn't smarter for me to simply make after tax contributions myself as the employee and roth convert them. I hope that makes sense and that I haven't got it too confused?

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      • #4
        To get 37k profit sharing requires compensation (salary from Corp) of 37k divides by 0.25 equals $148k

        If you only did salary deferral and employee after tax with no employer contribution then you only need compensation of $56k

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        • #5
          Great thank you. Any recommendations/sources for info regarding employer profit sharing route versus after tax contributions? Is there some sort of threshold where it makes sense to go one way or the other.

          Appreciate you,

          D

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          • #6
            24% tax bracket with zero state tax, some would definitely favor Roth, there's not really a right or wrong answer. You don't necessarily need a custom plan in your situation, you could use Etrade and just make employer pretax contributions, then in plan Roth rollover which Etrade uniquely allows, end result would be the same.

            Perhaps more pertinent in your situation is whether an S corp makes sense. You save some money on medicare tax, but you give up quite a bit of QBI deduction. Have you or a CPA run those numbers to make sure an S corp really pays off?

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            • #7
              Ok thanks for the recs. Yea, have a CPA on board who did crunch the numbers, and based on projections it made since, at least the way he explained it to me.

               

               

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              • #8
                I would want to verify numbers, and the analysis has to factor in QBI deduction in case of sole prop vs S Corp.

                It gets tricky. It may even be that after tax contributions and Roth rollover are better than pretax employer profit sharing followed by in plan Roth rollover because I think profit sharing reduces QBI.

                Was CPA analysis done after the TCJA?

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