Solo 401k tax question

[bizlady]

I have a retirement small business (sole proprietor) and recently opened a solo 401k plan. I know that I can as a business contribute up to 25% of the net profit (plus the $17500)

But assume that I will invest only 5.5k total this year into retirement.

My question is this: Aside from the social security savings, and the fact that I could ultimately put more aside, is there a tax advantage to making my small (5k this year)contribution as a business, versus doing a traditional IRA contribution?

It seems pretax income IRA deduction (I take a salary), or a deduction from the business earnings which reduces income by 5K, has the same net effect. What am I missing?

[gauss]

I believe that you would be able to make withdrawals prior to age 59 1/2 that are free of the early distribution 10% penalty from the 401k if leave "your employer" at age 55 or greater. This provision would not be available with the IRA option.

There was a discussion of the 401k "age 55 rule" as applied to solo 401ks at this thread.

-gauss

[unno2002]

Is anyone aware of a "guidebook" on how to fully utilize a solo 401k? Not just the advantages presented in the sales pitches, but the forms and procedures required to deal with the IRS, for example if you want to make an in-kind withdrawal, where are the forms & instructions to report the transaction, and make the tax withholding payment?

[jim584672]

You mentioned social security savings. 401k contributions never lowered my social security taxes when I was working. Only the transit check allowance lowered both taxes and social security taxes.

[gauss]

Quote:

Originally Posted by jim584672 You mentioned social security savings. 401k contributions never lowered my social security taxes when I was working. ...

Agreed. Social Security/Medicare contributions are calculated before the payroll subtraction of your pre-tax 401k contributions.

Payroll HSA contributions, on the other hand, are deducted before SS/Medicare contributions are calculated.

[Onward]

Quote:

Originally Posted by bizlady I have a retirement small business (sole proprietor) and recently opened a solo 401k plan. I know that I can as a business contribute up to 25% of the net profit (plus the $17500) It seems pretax income IRA deduction (I take a salary), or a deduction from the business earnings which reduces income by 5K, has the same net effect. What am I missing?

As a sole prop you can contribute up to about 19% of you net profit (plus the 17500) to a Solo 401k.

The contribution from the business would reduce your payroll taxes, whereas the IRA contribution wouldn't. Also, there are many differences between 401k's and IRA's (early withdrawal rules, protection from liability claims, etc.).

To me it looks like the 401k contribution is the better choice.

[dallas27]

+1 on using 401k to avoid FICA taxes. I give myself and wife a 2:1 match saving me boatloads in taxes.




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