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Tax strategy: Solo 401K and a LLC?
Old 12-25-2013, 08:45 PM   #1
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Tax strategy: Solo 401K and a LLC?

I'm considering having my wife set up a LLC in order to start a Solo 401k to reduce our tax bracket. I would appreciate any advice or suggestions that you may have.

Looking forward to 2014 our numbers should look something like this:

I should make about $100,000 in taxable income.

My wife should make about $60,000 in taxable income.

I will contribute $17,500 to my Thrift Savings Plan (military 401k).

We have two rental properties that provide about $45,000 in rental income. We still owe a combined $450,000 on the properties.

We have $1 million in investments.

My wife is a "contract" nurse, and her income is reported on a 1099. She will only be working at this job for 2014 and part of 2015.

I'm just starting to research the best approach for us. After searching this site, I found a discussion concerning similar circumstances that stated that a LLC wouldn't be necessary to start a Solo 401k. Although I know it shouldn't be much of a hassle to start the LLC, I haven't looked into the requirements much.

My questions are:

Do I need to start a LLC to start a Solo 401k?

Does the benefits of a LLC outweigh the risk of not having one? I believe that my wife is protected against lawsuits (etc) through her contracting company.

If I start a LLC, do I need to start it in Hawaii (currently live) or can I start it in another state?

Is there a better option than the Solo 401k?

Thank you, in advance, for any advice/suggestions.

Respectfully-

Jeremy
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Old 12-25-2013, 09:09 PM   #2
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I have a Solo 401k as a sole proprietorship. No need for an LLC. I think the Solo 401k has the highest contribution limits of the possible alternatives, though there are a lot of them. Definitely a good thing to look into.
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Old 12-25-2013, 09:28 PM   #3
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I also have a solo 401K and a sole proprietorship. It's probably the best deal as you can contribute the max and also add the business matching. Here is an informative link:

https://investor.vanguard.com/what-w...01k?Link=facet
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Old 12-25-2013, 09:44 PM   #4
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Quote:
Originally Posted by EmptyWallet View Post
My questions are:
Do I need to start a LLC to start a Solo 401k?
No. I have a Solo 401(K) with Fidelity and do not have an LLC. (Vanguard wsn't offering them when I started--I'd use Vanguard if starting today)

Quote:
Originally Posted by EmptyWallet View Post
Is there a better option than the Solo 401k?
No other option will let your wife put as much pre-tax money into a retirement account. It's not much trouble to set one up, but the account needs to be set up before the end of the calendar year so if you are thinking of doing this for 2013 money you may be too late. If you can't make the deadline, maybe go with a SEP IRA for 2013 and start the Solo 401K in January for 2014 contributions.
If you don't think she needs/wants all the pre-tax savings offered by a solo 401(K), then a SEP IRA might be just as good.
Remember--it's all taxed at the regular income rate when it comes out, including the cap gains. If the money were kept in after-tax accounts then the cap gains and dividends/interest would be taxed at the lower rates applicable to these types of return in the future.

Also, if you are planning to stop contributing/start withdrawing from the Solo 401K when your wife turns 55 (under the IRS rule that permits withdrawals from 401Ks at that age under some circumstances), you should as the solo 401K custodian if such early withdrawals are permitted under their standard plan document.
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Old 12-26-2013, 09:28 AM   #5
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+1 on the solo 401(k).
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Old 12-26-2013, 03:16 PM   #6
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You also have the option of a Solo Roth 401k. I did mine ((traditional and Roth) through E*TRADE because Fidelity did not offer the Roth. I think you'll want the traditional version with that level of income, but the Roth option is available.
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Old 12-26-2013, 08:15 PM   #7
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Originally Posted by Animorph View Post
You also have the option of a Solo Roth 401k. I did mine ((traditional and Roth) through E*TRADE because Fidelity did not offer the Roth. I think you'll want the traditional version with that level of income, but the Roth option is available.
The solo 401k Roth is also available from Vanguard.
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Old 12-28-2013, 09:40 AM   #8
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Quote:
Originally Posted by EmptyWallet View Post
I'm considering having my wife set up a LLC in order to start a Solo 401k to reduce our tax bracket. I would appreciate any advice or suggestions that you may have.

Looking forward to 2014 our numbers should look something like this:

My wife should make about $60,000 in taxable income.

I will contribute $17,500 to my Thrift Savings Plan (military 401k).

We have two rental properties that provide about $45,000 in rental income. We still owe a combined $450,000 on the properties.

We have $1 million in investments.

My wife is a "contract" nurse, and her income is reported on a 1099. She will only be working at this job for 2014 and part of 2015.

I'm just starting to research the best approach for us. After searching this site, I found a discussion concerning similar circumstances that stated that a LLC wouldn't be necessary to start a Solo 401k. Although I know it shouldn't be much of a hassle to start the LLC, I haven't looked into the requirements much.

My questions are:

Is there a better option than the Solo 401k?

As others have noted, your solo 401K has to be set up before the end of the year, but she can set up a SEP IRA and fund it up until April 15, 2014 for 2013 tax year (or possibly even later if she gets an extension, but she'd have to verify that).

One other note - if she is a 1099 employee, make sure she's taking her legitimate deductions for a self-employed person, including mileage each day to/from work (you are allowed to consider your house as your 'main office', even if you don't have dedicated office space in your house that you are deducting, and any traveling from your 'main office' is a legitimate business expense at around $.55/mile), along with any other legitimate expenses (membership fees for professional organizations, health insurance premiums, etc.). The IRS has quite a decent list on what they allow for deductions for the self employed.
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