Would love input to see if I’m able to open up an individual 401(k) in addition to my employer (hospital) 401(k). I’ve read this excellent article from WCI before (https://www.whitecoatinvestor.com/multiple-401k-rules), but had some questions regarding my specific situation.
My current situation (when I start in June) is the hospital I will work at will match 4% (if I contribute 5%) of my salary for a max up to $11,000. So the hospital would contribute $11,000 and I’d contribute the max that I could, which is $19,000. That equals $30,000.
Now, I have one main relatively low paying side gig. I occasionally take emergency room call at a different hospital as an independent contractor (1099) and make around $15,000 a year from that. Three questions with regards to this job:
- Can I set up an individual 401(k) with that small amount of 1099 income? I know I’ve maxed out my personal contribution, but for this situation I’m my own employer, so technically I should be able to contribute 20% of net-earnings from self employment, right? So I could contribute $3,000 (15k x 20%)?
- I currently don’t have an LLC or sole proprietorship set up. Because the $15,000 is so small, I just have it direct deposited straight into my checking account under my name. Will this cause a problem trying to set up my own individual 401(k)?
- I also have one or two other small side hustles, like doing some expert witness stuff where I make about $5,000 per year but this varies a lot. That also just goes straight into my checking account. If I combine that $5k and the previous $15k from my other side gig, that would be 20k. Therefore, I should be able to contribute 20% x 20k = $4,000 per year. I guess the question comes up again, do I need to set up an LLC or solo proprietorship for this? I’m pretty naïve when it comes to this stuff.
Thanks in advance for the advice. I’m actually meeting with my accountant tomorrow, I will see if he has any advice.January 8, 2019 at 6:02 pm MST #179716
There is no particular level of income needed to be able to adopt a solo 401k. So yes you can open a 401k.
By default you are a sole proprietorship as an independent contractor paid via 1099. A single member LLC is a disregarded entity for tax purposes and is not required.
There is no requirement for maintenance of a separate account for your sole prop. Though it can be helpful for maintenance of records especially if you have business expenses.
Other side gig income would be aggregated with your ER call income for purposes of your solo 401k.
You are correct in that your elective deferral limit is exhausted in the hospital 401k. So you could make an employer contribution of 20% of net self employment earnings which is business profit less one half self employment taxes.
The spreadsheet from The Finance Buff linked below in my signature can help you compute the precise amount.January 8, 2019 at 6:41 pm MST #179729jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 6660Joined: 01/09/2016
- You can contribute 20% of net (not gross) earnings. If I understand correctly, your calcution is based upon 1099 income before any related deductions. It would be unusual for you to have no deductions.
- You can have the same retirement acct and, therefore, the same deductions, regardless of whether you choose a SP, LLC, or s-corp.
- Same as answer 2.
I agree with everything @jacoavlu posted. The reason for my additional response is simply to emphasize that the calculation is based upon net (“taxable”) business profits (less 1/2 SE tax, as mentioned), not gross (1099) receipts.
Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
Great. Thanks for the replies. I met with my accountant today, and he said my side gigs (which probably make 20k max) don’t make enough to merit the hassle of starting a solo 401k and the administrative fees that come with starting and maintaining a 401(k).
He also recommended an LLC for my 1099 side gigs, just to make things simpler in terms of maintenance of records, write-offs, etc…January 9, 2019 at 5:23 pm MST #180018CMParticipantStatus: PhysicianPosts: 928Joined: 01/14/2017he said my side gigs (which probably make 20k max) don’t make enough to merit the hassle of starting and the administrative fees that come with starting and maintaining a 401(k).Click to expand…
I might be missing something here, but I opened a solo 401K in the past (for a gig with about 40K profit after business expenses) and the hassle was approximately equivalent to the hassle of opening any other brokerage account, no special hassle. There are no administrative fees. I used Schwab but you can probably do this anywhere.
Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried bags for Cyd Charisse (gracious). Hosted epic company parties after Friday night rehearsals.
A solo 401k is free. Minor hassle. Some record keeping required but you’re a functional adult so I’m confident you can manage. You’ll be smarter for the effort. DIY FTW.January 9, 2019 at 6:01 pm MST #180021GParticipantStatus: Physician, Small Business OwnerPosts: 1248Joined: 01/08/2016
Oh and a single member LLC is a disregarded entity for tax purposes. It has no effect on the schedule C (probably C-EZ) you’ll complete. Why bother? You can open a separate bank account, without an LLC.January 9, 2019 at 6:06 pm MST #180024
for the win as far as I know but I’m a middle aged man so maybe it’s something totally different to hip people
Okay. Good to know. Not sure why my accountant thought it would be so much work. All my accounts (personal/spouse Roth IRAs, traditional IRAs needed for backdoor Roths, taxable account) are through TD Ameritrade. Seems simple enough to do online. https://www.tdameritrade.com/retirement-planning/small-business/individual-401k.page
I need to be more assertive with my accountant I guess. I told him I didn’t need one, but he kept insisting it would simplify things and that’s how he thought it should be done. Didn’t seem like it would cause harm to do one, so I ended up caving and decided just to do it.January 9, 2019 at 6:16 pm MST #180030spiritriderParticipantStatus: Small Business OwnerPosts: 1415Joined: 02/01/2016
If an LLC hasn’t already been created, don’t do it. An LLC is not necessary, likely provides no benefit and may even be counter-productive.
An LLC can not possibly simplify anything. As has already been pointed out. A default single member LLC files taxes the exact same as a sole proprietor.
You must create the LLC which is an extra step. Requires formation fees, annual fees and maybe LLC specific taxes (e.g. $800 min in CA). You must have separate financial accounts that you do not comingle in order to preserve the liability protections.
Did you know that an LLC provides little to no liability protection for the personal acts of an LLC owner. The services you have described fall under that category. In some states, liability protection has been held to not apply to single member LLCs at all, only multi-member LLCs.
LLCs can in fact be a disadvantage for certain options in non-community property states.
You might want to consider that this CPA is not the best source of information for your circumstances. They are giving you a bogus justification for an LLC . LLCs can be the right choice, but are often a knee-jerk default recommendation. They gave you bogus reasons for not adopting a one-participant.
When Spiritrider talks, I listen. I emailed my CPA and told him I’d prefer not to do an LLC. I told him I’d just open a separate checking account and credit card (for business purposes and expenses) to keep things separate from my personal stuff. He emailed me right back and said that would be fine.
Thanks for the input on this topic, much appreciated. I know it has been discussed before, but this helped clarify a few things for me.jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 6660Joined: 01/09/2016
For the world?
Fire the wanker?
Free to work?Click to expand…
I still want to know what FTW means…
Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
https://fox-cpas.com/for-doctors-only/January 10, 2019 at 6:31 am MST #180119