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?s on self-employed 401ks
Old 02-15-2012, 07:26 PM   #1
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?s on self-employed 401ks

Ok, I was having lunch with a contractor that we have on a project. He mentioned that his DW has reasonable megacorp health benefits, so he is leveraging as much of his income into a self-employed 401k, stocking away about 40k a year. He is in his mid-40s so no catch up contribution included. By stocking away $40k a year, he reduces his taxable income and get paid for all hours worked. Not sure if he is w-2, 1099, or Corp to Corp, I will have to ask. For 2011, employee contribution of $16.5k and employer contribution of 20% net income.

I’m currently an employee for megacorp, however I see this to be a great option. I can sign-up with a few IT temp agencies. There is a shortage in my field, most experienced contractors are paid between $60 – 75 an hour with a bill rate range of $85 to $110. Most of the contractors work reasonable hours with limited bench time. If I form an LLC and get the business direct, I could maybe take a bigger cut and write off expenses, e.g. mileage, business lunches, etc.

I see this as a huge benefit if I RE at age 52 – 55 and backdoor it to a Roth IRA, potentially paying a lower tax rate on funds.

Looking for feedback….could this be a better way to defer compensation? Also,
Other than risk of bench time, what am I missing?
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Old 02-15-2012, 07:43 PM   #2
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Do you contribute to a 401k at your megacorp job?
No matter how many 401ks you have available to you, you can only contribute your max (pretax) of $14,500 each year. However, after tax contributions to a 401k are possible, if permitted by the plan. These are what you can roll out to a Roth (possibly).
Do you have a CPA? It would be better for someone familiar with your specific tax situation to review your plan.
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Old 02-15-2012, 07:51 PM   #3
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Originally Posted by Sarah in SC View Post
Do you contribute to a 401k at your megacorp job?
No matter how many 401ks you have available to you, you can only contribute your max (pretax) of $14,500 each year. However, after tax contributions to a 401k are possible, if permitted by the plan. These are what you can roll out to a Roth (possibly).
Do you have a CPA? It would be better for someone familiar with your specific tax situation to review your plan.
I've been using Turbo Tax the last few years, but will probably speak with an CPA this year.

Yes, I do contribute to the Megacorp annual limit. I believe it's $17k in 2012 along with receiving a small match.

I beleive the self employed 401k allows a max of $17k in 2012 regardless of the number of plans available however the employer contribution (self employed) can contribute an extra 20 or 25% of net income, increasing deferred $$ and reducing taxes.

Thanks for the reply... very interested in deferring taxes.
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Old 02-15-2012, 07:52 PM   #4
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I see that my post might very similar to another thread here on solo 401k, not sure.
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Old 02-15-2012, 08:52 PM   #5
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Solo 401k is a great way to shield income if you are self employed. I made $29k in 2010, stuffed it all in the Solo 401k and none of it showed up on my taxes. None of the other retirement account options seemed to allow such a high contribution limit. Although if I had made any more it would have been mostly taxable. Not sure it would work if you are still employed. You can also set up a Solo Roth 401k, though of course that doesn't give you an immediate deduction.
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Old 02-15-2012, 10:20 PM   #6
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One flaw is that it'll be tough to go "direct." Not only do most companies want a buffer between you and them, you also need contacts in order to get business. It requires a lot of hustling and you have to enjoy doing it because it gets old fast. I'd recommend going the agency route and, eventually, you'll become a desired commodity and can demand a higher rate/cut.

If you're a 1099 or a C2C (and 1099 yourself through your C), you can deduct mileage and lunches and books and computers, etc., without the 2% floor.

Oh, you'll also need to figure out health care.
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Old 02-15-2012, 11:02 PM   #7
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Solo 401k is a great way to shield income if you are self employed. I made $29k in 2010, stuffed it all in the Solo 401k and none of it showed up on my taxes. None of the other retirement account options seemed to allow such a high contribution limit. Although if I had made any more it would have been mostly taxable. Not sure it would work if you are still employed. You can also set up a Solo Roth 401k, though of course that doesn't give you an immediate deduction.
I guess its 25% after 17000 (or similar amount), so how did you manage all the money tax-free? Roth?
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Old 03-06-2012, 05:36 PM   #8
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This is the best way to defer income that I know of.

You can put in the minimum plus 20% up to $49,000. (2012 might be 50K).

It comes right off of your 1099 income minus business expenses and some self employment tax. Yay. I've been doing it for years. Easy money.

Call IRS and get an EID. Takes 5 minutes. Fill out an application at a brokerage firm and include your EID.

Done.

Now you self direct your 401k online, and buy ANYTHING you want to. Options, stocks, mutual funds.
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Old 03-06-2012, 05:38 PM   #9
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I guess its 25% after 17000 (or similar amount), so how did you manage all the money tax-free? Roth?
There's no way to legally do that. If you make 29K of reported income, you can deduct a lot of it, but you will still need to pay self employment tax and minimal taxes.
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Old 03-06-2012, 11:46 PM   #10
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We are self-employed and have a Solo 401(k) plan @ Vanguard.
The maximum deferral limit for 2012 is $17,000. Individuals age 50 or older can make an extra $5,500 "catch-up" contribution for 2012, for total deferrals of $22,500.
The maximum combined EmployEE and EmployER contributions cannot exceed $50,000 for 2012. (Catch-up contributions do not count toward this limit.) So, for the participant age 50 or older who makes "catch up" contributions, the combined contribution limit for 2011 is $55,500.

Note that the employER contributions works out to around 20% of your net self-employment income if you do the worksheet for self-employed individuals (Fidelity has a good one). You pay 15.3% (less this year) of your net profit on SE tax, although you get a tax deduction for half of it. But don't discount the SE tax - we pay more on SE tax than Federal tax because it's calculated before any personal tax deductions and exemptions. You can be a sole proprietor as husband & wife (that's what we are), and still have the $17K contribution per spouse, assuming you have enough profit of course.

Also, if you form a company as husband & wife, you should be able to save $17K per spouse if the spouse if materially working in the business. Hire your spouse as the bookkeeper? Ask your CPA about that though. (We share the business 50/50 so we don't have to make anything up!)
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Old 03-09-2012, 02:21 PM   #11
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I personally have an S-Corp. Solo 401k at Vanguard. I pay myself a reasonable salary and then have the corp pay 25% of my gross W2 salary into my 401k. That's in addition to the $17k personal limit, so I contribute over $30k per year. It has worked out well for me for the last few years. I think the rules are different for LLCs.
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Old 03-09-2012, 02:46 PM   #12
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Solo 401(k) is a gang-buster way of shielding self-employment income. T Rowe Price has some examples showing how powerful this is.

Keep in mind, though, that you still pay the full FICA tax (both employee and employer portion) on any self-employment income. Those taxes are paid regardless of 401(k) contribution. This may diminish the value of starting consulting work just for the tax break.
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Old 03-09-2012, 02:59 PM   #13
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I guess its 25% after 17000 (or similar amount), so how did you manage all the money tax-free? Roth?
The 20%/25% (depending on type of business) starts with the first dollar, so at 20% and with 50+ catchup you reach just about $30k before it shows up as top line income on your taxes.

Yes, you do have to pay FICA and Medicare off the top, though you get a deduction for half of it. Nothing you're going to do about that. In my case I was trying to keep the AGI below limits for some tax credits and Roth contributions.
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solo 401k
Old 03-17-2012, 08:55 AM   #14
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solo 401k

I opened one of these for 2011 when about half of the year I was a self employed 1099 contractor. Lots more paperwork. I opened it at Fidelity at one of their offices and they walked me thru it, very easy. I did not even need a EID at that point, I used my SS #. I don't know if I will have any significant self employment income in the future, and the one thing they mentioned is that the IRS would 'expect' this to be rolled into an IRA or other qualifying plan if I don't have any SEI in the 'future', tho there seemed to be some debate on what that meant, 2yrs? 5yrs? Nobody could give me a straight answer, probably a cpa question. It is a fantastic way to shield a bunch of $$ from the tax man tho.
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