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Self-Employed 401(k) Questions
Old 03-31-2009, 03:01 PM   #1
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Self-Employed 401(k) Questions

I'm a full-time W2 employee but also do consulting 1099 work on the side. I'm thinking about opening a Solo 401(k) and contributing most of my self-employment profit to it. From my consulting job I made $5,000 for Q1-09. Out of that profit I'm wondering how much I can contribute to my Solo 401(k) and what my estimated tax payments should be for this quarter. I'm in the 25% tax bracket for federal and 7% for state.
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Old 03-31-2009, 03:39 PM   #2
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I don't know about your estiimated taxes.

For 2009 you'll be able to contribute $16,500 (your "elective deferral") plus 20% of your net income from your side business. This is assuming you contribute nothing to the 401K at your regular job.
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Old 03-31-2009, 03:44 PM   #3
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It partly depends on how much you are contributing to your 401K from your W2 job. You can max out your 401K for your age and income between your job and solo 401K limits, but you cannot go over the maximum contribution limits in total. In 2009 maximum contribution limits are $16,500, plus another $5,500 in catch up contributions if you are over 50.

You can also deduct profit sharing contributions of up to 25% of your side business compensation from your 401K, up to certain maximum limits.

Fidelity has a good page explaining how much you can deduct with a solo 401K.

After those contributions are maxed out you can still make a deduction to a nondeductible IRA (5,000 under 50 / 6,000 over 50) and convert it to Roth IRA in 2010.
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Old 03-31-2009, 06:49 PM   #4
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Thanks for the replies. So my 403(b) contribution with my W2 employer plus my Solo 401(k) can not exceed $16,500? If that's the case, I might just try to max out my 403(b) and save myself the paperwork with the solo 401(k).

I would like to Safe Harbor my estimated taxes but am a little confused with how my W2 taxes come into play. My understand is that I should:

1. Figure out how much I paid last year and divide by 4. This is how much I owe Uncle Sam each quarter.

2. Look at my W2 paystub and figure out how much I already paid in Federal and State taxes each quarter.

3. Subtract #2 from #1 and send a check to the IRS and State DOR.


Is this the proper steps? It seems easy enough.
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Old 03-31-2009, 08:06 PM   #5
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Here's an article from 2007 - but I saved the link because it explains how if you earn just a little from a side business, you may be able to contribute more to a Solo 401k than a SEP.

SEP vs. Solo 401(k) - Kiplinger.com
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Old 03-31-2009, 08:17 PM   #6
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Originally Posted by bank5 View Post
Thanks for the replies. So my 403(b) contribution with my W2 employer plus my Solo 401(k) can not exceed $16,500? If that's the case, I might just try to max out my 403(b) and save myself the paperwork with the solo 401(k).

I would like to Safe Harbor my estimated taxes but am a little confused with how my W2 taxes come into play. My understand is that I should:

1. Figure out how much I paid last year and divide by 4. This is how much I owe Uncle Sam each quarter.

2. Look at my W2 paystub and figure out how much I already paid in Federal and State taxes each quarter.

3. Subtract #2 from #1 and send a check to the IRS and State DOR.


Is this the proper steps? It seems easy enough.
As I recall, the very first year I had self-employed income I did no estimated taxes. Nothing. If I recall correctly, this is a relatively small sideline (approx $15K) you are starting, so the extra taxes won't be much, and you can pay them when you file your taxes. There will be a penalty/interest, but it won't be much. If you get your Solo 401(K) set up before the end of the year (put a minimum deposit in there to keep it open), you can dump the appropriate amount in after the year ends and you know exactly how much you can deposit.

After the first year, when you've been through everything and you know how much you are likely to earn, how to do the solo 401(k), etc you can start making your estimated tax payments. I don't bother trying to estimate every quarter what they should be--I just use the previous year's amount and divide by 4 to figure my quarterly payments.. There's a procedure for doing this--it comes with the tax software you probably use.

The "Elective Deferral" portion of your solo 401(K) PLUS your 403B contribution cannot exceed $16,500 in 2009. The other portion of your solo 401)K) contribution is called the "profit-sharing" portion, and it is limited to 20% (not 25%) of you net income from your side business (after subtracting 50% of the self-employment tax). This is not affected by the contributions you make to your 403b at work. It has a cap, but it is very high and you wont hit it unless your side business is making somewhere north of $100K.

Here's a site where a question is answered similar to your question here.

I'd also recommend the Fidelity site referenced earlier.

Finally, when deciding between funding your solo 401K or your 403B, consider the choices you have in both areas. If you go ahead with the Vanguard Solo 401(K) you'll have tons of great low-cost investment options available.

Try not to make this too hard. All I'd do in your shoes right now is set up the solo 401(k) at Vanguard and then concentrate on my side business. I'd do that until March of 2010. Then I'd figure my taxes, make my investments into Vanguard for my Solo 401(k) and simultaneously start making my estimated tax payments for 2010. Throughout this year, squirtrell away money, because you'll need a lump of it in April 2010: To pay your 2009 taxes, to fund your solo 401(k), and to make your first estimated tax payment for the 2010 tax year.

Good luck.
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Old 03-31-2009, 09:57 PM   #7
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The profit sharing contribution is 25% except for sole proprietors, in which case it nets out to 20%. So pick the right percentage depending on how your business is structured.
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Old 03-31-2009, 10:29 PM   #8
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The profit sharing contribution is 25% except for sole proprietors, in which case it nets out to 20%. So pick the right percentage depending on how your business is structured.
Right.
Corporations: 25% (and, obviously, don't subtract 1/2 of the self employment tax, because there isn't any)
Sole proprietorships: 20%
Partnerships (or LLCs taxed as partnerships): 20%

Lots more here. But, based on what I think you've said elsewhere (sole proprietor, you are the only employee), then 20% is the profit-sharing component (again, compute the 20% after you subtract 1/2 of the self employment tax).
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Old 04-01-2009, 02:52 AM   #9
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I have a spreadsheet that calculates this. Google "part-time solo 401k".
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