Solo 401k Questions

[shigsy]

Hello all,

I am currently selling my portion of a business to my partners. As part of my compensation, I will receive money over a two year period (spanning three calendar years). I'd like to take a portion of that money as income, so I can put it towards a tax-advantaged account. The remainder will be subject to long term capital gains. Here are my thoughts so far, please feel free to offer criticisms:

I'll take the first $50K annually of these payments as 1099 income and open a Solo 401k (presumably with Vanguard, where my current 401k resides). The $50K figure allots @ $44,500 annually to the 401k (the current max for 2007) with the remainder of $5.5K to go towards self employment taxes.

I should be able to do this in tax years 2007, 2008 and 2009. Allowing me to subject @ $130K only to self employment taxes (@ 15%) instead of long term capital gains (@ 25-30%).

Anything I am missing, or any advice on handling this more efficiently, with an eye towards reducing the tax liability?

Thanks

 

[Mysto]

A couple of things. First Vanguard is not set up to handle Solo 401k directly you would have to have it done for you.

Brewer was kind enough to direct me to Fido - they can set it up and have a couple of people that may be able to give you some advise.

Hope this helps.

 

[Peter]

I'll take the first $50K annually of these payments as 1099 income and open a Solo 401k (presumably with Vanguard, where my current 401k resides). The $50K figure allots @ $44,500 annually to the 401k (the current max for 2007) with the remainder of $5.5K to go towards self employment taxes.

This assumes the $50k isn't your only employment income. If it is, then you wouldn't be able to make that maximum $44,500 contribution.

Peter

 

[shigsy]

A couple of things. First Vanguard is not set up to handle Solo 401k directly you would have to have it done for you.

Brewer was kind enough to direct me to Fido - they can set it up and have a couple of people that may be able to give you some advise.

That's too bad about Vanguard, I was hoping to keep everything there. I assume then that I'd have to go with a 3rd party admin? Probably not something I want to do. Is "Fido" Fidelity? Thanks.

This assumes the $50k isn't your only employment income. If it is, then you wouldn't be able to make that maximum $44,500 contribution.

I will definitely have other earned income (W-2), but won't be participating in any retirement plans. Does that preclude me or limit my participation in a Solo 401k?

 

[d]

to subject @ $130K only to self employment taxes (@ 15%)

... but won't this also be subject to future taxes upon withdrawal at regular tax rates? would seem that capital gain rates are more beneficial than regular + self-employment rates.

 

[brewer12345]

Yes, Fido = Fidelity. THey made it quite painless for us to set up a solo K and it cost nothing.

 

[saluki9]

Yes, Fido = Fidelity. THey made it quite painless for us to set up a solo K and it cost nothing.

Vanguard wants nothing to do with small retirement accounts. Fidelity is the way to go. They are far and away the cheapest provider for the solo K

 

[ash]

.

 

[shigsy]

... but won't this also be subject to future taxes upon withdrawal at regular tax rates? would seem that capital gain rates are more beneficial than regular + self-employment rates.

Good point. Short of disaster, the money won't be touched for 20 years, at which time it will be taxed as income as it's withdrawn, probably in a lower tax bracket.

So is the overall higher tax negated by the fact that it gets to grow tax free for 20+ years? I'll have to run some numbers through Excel to see. Thanks for pointing this out.

--------------

Thanks for the tips on Fidelity. I'll look into that. It's good to hear that it's cheap/free, as I hate paying fees for giving people my money.

Peter posted earlier in the thread alluding that there were some restrictions on Solo 401k's if you had other income. Any more thoughts on that? I'll definitely have some W-2 income from another source during this same time.

 

[d]

probably in a lower tax bracket

possibly in a lower tax bracket ... meaning as well, possibly in a higher tax bracket.

 

[shigsy]

possibly in a lower tax bracket ... meaning as well, possibly in a higher tax bracket.

I think there is a more-likely-than-not probability that I will be in a lower tax bracket in retirement. If I had to wager one way or the other (which in effect I do), I'll wager on the lower tax bracket.

 

[saluki9]

Thanks for the tips on Fidelity. I'll look into that. It's good to hear that it's cheap/free, as I hate paying fees for giving people my money.

Fidelity isn't a charity. They are a for profit company that makes hundreds of millions of dollars a year, so it isn't going to be free.

 

[shigsy]

Fidelity isn't a charity. They are a for profit company that makes hundreds of millions of dollars a year, so it isn't going to be free.

Haha, of course! I was merely commenting in response to Brewer's comment "THey made it quite painless for us to set up a solo K and it cost nothing."

All I assume he meant was that they didn't charge anything for the setup, in return for customers putting money into their mutual funds (which they do make money on).

Anyone know what they charge for annual administration fees?

Although, unfortunately it looks like it might be a moot point, as from what I can read, one can only contribute up to 25% of self employment income to a Solo 401k, and I'd be needing to contribute closer to 100% to make the whole thing worthwhile from a tax standpoint.

 

[brewer12345]

Fido charges me nothing for setup or admin fees.

Call Fido and ask them about contributions. We chuck in 100% of DW's self emplyment income (up to the base amount of $15k or so). After that the 25% thing applies as I understand it. And some tax shelter is probably better than none.

 

[Mysto]

Go to www.401kbrokers.com. Not for their service but they have an online calculator that will tell you what your contribution will be. (This assumes you meet all the other criteria)

I too have all my money at Vanguard but the Fido deal was too good to pass up. Their SP500 index fund has a lower expense rate than Vanguard's and they have a few other funds that seem pretty good.

Make sure you talk to their reps at length because once you pass 100k there is additional paperwork required (also when you convert it to a standard IRA)

 

[haha]

Make sure you talk to their reps at length because once you pass 100k there is additional paperwork required (also when you convert it to a standard IRA)

Did you mean no additional paperwork until you reach $100,000? Because once that is reached, these accounts require either a 5500 or a 5500EZ to be filed annually.

Ha

 

[eridanus]

Just a clarification,

it's $15,000 +

20% if you're a 1099 employee;
OR, 25% if you're a W-2 employee

 

[pasttense]

Fidelity is the way to go. They are far and away the cheapest provider for the solo K

No. TD Ameritrade has no plan setup fees nor annual fees--just the standard commissions for buying/selling stocks and mutual funds.