Announcement

Collapse
No announcement yet.

Does solo 401k make sense for me?

Collapse
X
Collapse
First Prev Next Last
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Does solo 401k make sense for me?

    I have a small side consulting gig where I get $6,000 a year. I also pick up some other odd and end type jobs up to about $2,000 but for all intents and purposes the $6,000 is prettty consistent.

    Based on the finance buff's calculator, my $17,300 401k contributions leave me with a salary deferral of $2,200 and a Profit sharing of $1,184.
    The reason my 401k contributions aren't $19,500 is because we fail safe harbor. In all reality, the most we can usually put in is $15,000 - $15,500.

    If I adjust my 401k contributions to $15,500, then I could put $4,960 into a solo 401k vs. the original $3,384.

    Is it even worth me doing a solo 401k for a relatively small amount of money? Would it be worthwhile to lower my 401k contributions to allow myself to be able to stick the difference into the solo 401k? Am I even looking at this correctly?

  • #2
    You won't be giving up an employer match I assume?

    Besides the income tax deferral, the major advantages of a Solo 401k are avoidance of dividend taxes and a future rollover account for when you separate from your employer. Over decades, it really adds up.

    I started one last year and only put about $3,000 in it. But I rolled over my old accounts into it (saves me a little money in fees), and this year I should put $57k into it. So while there may be some hassle upfront, the work may pay off for a long time.

    Comment


    • #3
      if you are going to making 6k consistently as IC i would say it's worth it.

      i find the amount of work it requires to deal with my s401k minimal, generally one trip to that calculator and 1 check/year.

      if that shields a few hundred from taxes and gives you some extra space why not?

      there is very little downside to your plan aside from a bit of time on your part. i think you'd find your "hourly rate" to be hundreds/hour here.

      i am finding s401k to be particularly nice come year end when for whatever reason you haven't maxed your employee side at your job. just more money in said check and you are "trued up." it has saved me some pain having to change contributions in the face of shifting comp due to extra shifts/bonuses etc.

      Comment


      • #4
        It is consistent for the most part. They could obviously cut ties with me whenever they want to do so. Yes, it comes to $500/hour. My consistent work schedules a call at the beginning of each month. We discuss market rates, utilization, etc... The other odd & end jobs usually come before quarterly reports come out. With the two groups I use, my rate is set at $500/hour.

        Do you make your S401k contributions annually or can I make them quarterly as I am paid?

        I am still unclear on some of the things I have read. Will I make the difference in salary deferrals and be able to deduct them from income or should I just consider these as a S401k roth contribution?

        Comment


        • #5
          There are 2 good reasons for a solo-k on minimal income (impo):
          1. To serve as a receptacle for future rollouts when you change jobs, and
          2. To take advantage of a megabackdoor Roth.
          Given that, in this situation, I d/n believe it w/b worthwhile (cost and hassle) for a mbd Roth at only $6k gross, I am still speaking to you lurkers with a side hustle of $25k - $75k (very rough guesstimate and will vary based on personal circumstances).. For point 1, however, I simply don’t see the downside. What’s it take...30-45 minutes per year? Big deal.
          Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

          Comment


          • #6
            I went ahead and set it up yesterday with Vanguard. $0 setup fee and they charge $20/year for the number of funds you hold so I just picked VTSAX for now. It literally took 15 minutes to fill the Vanguard form out and maybe 10 to apply for my EIN.

            The way I'm approaching the i401k is that this helps me bridge the gap of not being able to max my 401k with my current employer. Who knows. Maybe one day I'll hit a homerun and pick up a $50k side hustle.

            Comment


            • #7
              Be aware that Vanguard does not allow incoming rollovers.

              Comment


              • #8
                Originally posted by Lithium View Post
                Be aware that Vanguard does not allow incoming rollovers.
                Current employer in your comment is critical. Johanna’s #1 comment is for future rollovers. For that, you would need to move from Vanguard, now or later. I have heard Fidelity and E-Trade before.

                Comment


                • #9
                  Originally posted by Tim View Post

                  Current employer in your comment is critical. Johanna’s #1 comment is for future rollovers. For that, you would need to move from Vanguard, now or later. I have heard Fidelity and E-Trade before.
                  Vanguard is the only major broker to my knowledge that has this issue. E-Trade is unique because it allows in-plan Roth conversions.

                  Comment


                  • #10
                    Good to know. FWIW, I work for a family company. Which isn't 100% job security since [email protected] happens, but it's pretty high up there. I went with Vanguard because our Money Market (e-fund), Roth IRAs, and UTMA are already there.

                    Comment


                    • #11
                      Originally posted by The Wiz View Post
                      The reason my 401k contributions aren't $19,500 is because we fail safe harbor. In all reality, the most we can usually put in is $15,000 - $15,500.
                      this doesn’t make sense to me. Please explain further. Who is “we”? How much is your W2 income?

                      Comment


                      • #12
                        Originally posted by The Wiz View Post
                        The reason my 401k contributions aren't $19,500 is because we fail safe harbor. In all reality, the most we can usually put in is $15,000 - $15,500.
                        One additional little known issue that you may or may not know.

                        The employee deferral limit applies to your deferrals as made. Any amount returned as excess contributions due to an ADP testing failure at your employer's 401k plan. Does not return that amount to be available for other employee deferrals. If you want to maximize your employee deferral limit across both plans, you will need to self-limit your employee deferrals to your employer's 401k plan. Such that no amount is returned as excess contributions.

                        Comment


                        • #13
                          Correct. That is how I understood it and maybe I wasn't clear up above. My employer is top heavy. Therefore, the company fails safe harbor. As a result, the highest, usual maximum contribution is somewhere around $15,000'ish.

                          My thought process was to reduce my contributions to those "limits" and make up the difference through my solo 401k.

                          Comment


                          • #14
                            you mention you work for a “family company”

                            is this your family, as in your relatives own the business that employs you?

                            if so, you should examine the family attribution rules that may be applicable. I am not familiar, only to know that they exist and situations can get complex and messes can be created when people are unaware and a controlled group issue is created inadvertently.

                            these rules not only pertain to spouses but also parents-children and others

                            Comment


                            • #15
                              Yes. My wife's step dad owns a private business. It has nearly 800 employees. I'll have to look into the rules you mentioned. They're foreign to me.

                              Comment

                              Working...
                              X