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Question about Starting Individual 401(k)

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  • Avatar tylerspear212 
    Participant
    Status: Small Business Owner
    Posts: 1
    Joined: 04/08/2019
    Disability Insurance

    Hi All!

    I recently came across WCI and have to say that I love the website- thanks for hosting this community!

    Some general info before I get started- I’m a 23 year old recent college graduate currently working as a research associate for professors at a local college while I wait to hear the results of an application I submitted to join the Navy. Part of the work I do is paid by W2 through the university and another portion of it is paid through a 1099MISC as I’ve also been hired as an independent contractor for another professor. Since the work I’m doing is either hourly (the W2 income) and as an independent contractor (1099 income), I have no retirement package, thus there was great appeal in starting a sole proprietorship so that I could open an individual 401(k) and begin saving in addition to claiming deductions for travel, office expenses…etc.

    I downloaded and read the Vanguard Individual 401(k) agreement in its entirety and think that I have a pretty good understanding of its basic mechanics/terms but came away with a couple of questions I thought I’d ask everyone before I sign and mail the documents. I’ll be calling Vanguard to ask these questions as well but thought it would be a good idea to crowdsource. I apologize in advance if any of my questions are unclear and will do my best to respond promptly if you have any questions for me.

    -For tax year 2018 I only reported my 1099 income as being business income because my W2 income was paid to me as an employee of the university and only the 1099 was paid personally to me. Obviously I would be able to contribute as much of my 1099 income as is permissible towards the individual 401(k) but my W2 income is roughly double that of my 1099 income and I’d like know if I’m permitted to make additional contributions to the individual 401(k) beyond the total of my 1099 business income. Essentially, I’m asking if I can make contributions out of my own pocket rather than as only contribute through deferrals from my business paycheck.

    -The situation is complicated by the fact that I expect to be a member of the military in between 6 and 8 months. After joining I obviously don’t expect to receive business income anymore and so I’d also like to know if anyone knows if I would be able to continue making contributions to my individual 401(k) account although I’m not drawing regular income through my sole proprietorship.

    These are the two major questions I have so far and I’d greatly appreciate any advice anyone can offer. This is my first post on WCI and I apologize if I broke any rules or customs for this forum. I hope my background info and questions are clear.

    Thanks so much!

    Tyler

     

    #204902 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7161
    Joined: 01/09/2016

    Hi, Tyler –

    First, thank you for your willingness to serve our country – I hope it is a wonderful experience for you.

    As for your questions:

    1. No, you cannot make retirement contributions based upon your W2 income. They will be based only on your net profits as a small business owner. Since you did not set up your solo-k up before 12/31/18, you’ll need to contribute to a SEP IRA and then roll over to a solo-k that you open this year. That is unfortunate, because you’ll be able to contribute only 20% of your net profits instead of starting with the dollar-for-dollar $19k employee contribution to your solo-k. I wrote this article to help people in your situation.
    2. Going forward, you will not be able to continue to contribute to your solo-401k unless you have business income.

    Two other thoughts:

    1. Since you won’t qualify for the TSP match this year, go ahead and contribute the full $19k to your solo-k for 2019 (limited by net profits, of course).
    2. Vanguard is not the best broker for solo-k’s. Depending upon your earnings this year, you might want to make part of your contribution to a Roth option in your solo-k, which Vanguard does not offer. TDA and E*TRADE do, not sure who else.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #204977 Reply
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 1874
    Joined: 01/03/2017
    Vanguard is not the best broker for solo-k’s. Depending upon your earnings this year, you might want to make part of your contribution to a Roth option in your solo-k, which Vanguard does not offer. TDA and E*TRADE do, not sure who else.

    Click to expand…

    I just wanted to re-iterate this as Vanguard also doesn’t allow incoming rollovers into their solo 401k. I think there has been some talk about this possibly changing but I think the latest information from Bogleheads is that they’re still not allowing it. You may want to look at Fidelity if that’s the route you decide to go.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #204981 Reply
    Liked by spiritrider
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7161
    Joined: 01/09/2016
    Earnest refinancing bonus
    I just wanted to re-iterate this as Vanguard also doesn’t allow incoming rollovers into their solo 401k. I think there has been some talk about this possibly changing but I think the latest information from Bogleheads is that they’re still not allowing it. You may want to look at Fidelity if that’s the route you decide to go.

    Click to expand…

    Yep, another good point. And Fidelity, as much as I like them, doesn’t allow the Roth option.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #204984 Reply
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 1874
    Joined: 01/03/2017
    Yep, another good point. And Fidelity, as much as I like them, doesn’t allow the Roth option.

    Click to expand…

    I didn’t know that about Fidelity. You’d think one of these brokerages would be able to offer all of these options. I guess it isn’t as easy as it sounds.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #204997 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7161
    Joined: 01/09/2016
    Yep, another good point. And Fidelity, as much as I like them, doesn’t allow the Roth option.

    Click to expand…

    I didn’t know that about Fidelity. You’d think one of these brokerages would be able to offer all of these options. I guess it isn’t as easy as it sounds.

    Click to expand…

    Neither did I until a client told me the other day 😁

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #205001 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1626
    Joined: 02/01/2016

    Why would there be a mainstream one-participant 401k provider that offered all options, it would be too easy. I think Etrade comes the closest with the addition of In-plan Roth rollovers.

    I prefer Fidelity first, Schwab second, but neither offers designated Roth accounts. This is now more important with the QBI deduction.

    #205066 Reply
    Avatar Path Guy FI 
    Participant
    Status: Physician
    Posts: 5
    Joined: 09/18/2018

    Why would there be a mainstream one-participant 401k provider that offered all options, it would be too easy. I think Etrade comes the closest with the addition of In-plan Roth rollovers.

    I prefer Fidelity first, Schwab second, but neither offers designated Roth accounts. This is now more important with the QBI deduction.

    Click to expand…

    Curious why you prefer Fidelity? I will be opening an individual 401(k) this year and am considering both Schwab and Fidelity.

    #205535 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1626
    Joined: 02/01/2016

    I had no need for designated Roth contributions, loans, ETFs, etc… I did need to rollover IRAs, invest in low cost index funds, use employee eligibility restrictions, had other assets there and a branch office nearby.

    #205577 Reply
    Liked by Peds

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