Solo 401k Question - Low Self Employment Income

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JiminyCricket
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Joined: Sat Aug 22, 2015 5:31 pm

Solo 401k Question - Low Self Employment Income

Post by JiminyCricket » Sun Oct 29, 2017 2:25 pm

Hi All,

I could use some help. A potential tax advisor I interviewed last week reviewed our 2016 tax returns and indicated I should consider setting up a Solo 401k in my wife's name related to her self-employment income of around $3,600.00 annually (part-time work she does while watching our kids full time at home). Given my income is several hundred thousand dollars, the tax advisor indicated the effective tax rate on her small income is pretty darn high (in excess of 50%). I did some research into Solo 401ks and have the following questions:

1. Is a Solo 401k the same as an individual 401k?
2. If my wife earns $3600 in 2017, what is the maximum she can contribute (I am seeing calculations of $3,345.67)?
3. What provider(s) would you recommend (Vanguard, TD Ameritrade, Fidelity, etc.)? I would expect to invest in low cost index funds.
4. Can we roll over her 401k from a past employer? Should we?
5. Any other facts that we should consider?
6. Do you agree we should do this?

Thank you to any one who takes the time to respond. I appreciate it.

aristotelian
Posts: 3007
Joined: Wed Jan 11, 2017 8:05 pm

Re: Solo 401k Question - Low Self Employment Income

Post by aristotelian » Sun Oct 29, 2017 2:40 pm

Yes, solo 401k and individual 401k are one and the same. We do the same thing for my wife's side gig.

fabdog
Posts: 192
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: Solo 401k Question - Low Self Employment Income

Post by fabdog » Sun Oct 29, 2017 3:06 pm

to answer a few more of your questions

On the contributions, amount seems about right. At low earnings, you can put in everything except half the self employment tax

I used Schwab for mine, the setup was easy, and since I had about the same annual amount as your wife coming in irregular intervals, their low cost low minimum funds were great

Not clear there is an advantage to roll over her old 401(k) to this vehicle. IF she has poor/high expense funds in her old 401K, you could rollover to the solo, or into an IRA.

If you don't need the money to spend (sounds like you don't) then I would go for it

account needs to be open by Dec 31st of this year

Mike

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401k Question - Low Self Employment Income

Post by Spirit Rider » Sun Oct 29, 2017 4:02 pm

  • The IRS refers to these as one-participant 401k plans. All the other names are marketing terms. Vanguard & Scwab = Individual 401k, TD Ameritrade = Solo 401k, Fidelity = Self-Employed 401k.
  • $3,345.67 is correct if her Schedule C net business profit (income - expenses) = $3600.
  • Schwab is better for low dollar amounts.
  • Rollovers to Vanguard's Individual 401k are not allowed, but are allowed by the others. fabdog covered the pros and cons. Also, her past employer's 401k may have better asset protection depending on your state.
  • As fabdog stated; She must adopt a one-participant 401k by 12/31. She must also make a written employee deferral election by then (100% of compensation). But she has until your tax filing date including extensions to make the contributions.
  • Every little bit helps when it comes to taxes and increasing her retirement plan contributions. This also makes sense in thee interest of fairness. You may treat it as one family portfolio, but they are still individual accounts. Happy wife -> happy life

JiminyCricket
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Joined: Sat Aug 22, 2015 5:31 pm

Re: Solo 401k Question - Low Self Employment Income

Post by JiminyCricket » Sun Oct 29, 2017 9:59 pm

Thanks everyone. Question for Spirit Rider: what do you mean by "her past employer's 401k may have better asset protection depending on your state"?

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401k Question - Low Self Employment Income

Post by Spirit Rider » Sun Oct 29, 2017 11:10 pm

An employer retirement plan that only includes the owner(s) and optionally their spouse(s) is not protected under ERISA's anti-alienation provisions. This means that while a one-participant 401k receives unlimited federal bankruptcy protection, it receives no federal creditor asset protection.

Therefore, creditor asset protection is subject to state laws. While most state laws provide creditor asset protection, some don't. You need to check your specific state's laws.

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djpeteski
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Joined: Fri Mar 31, 2017 9:07 am

Re: Solo 401k Question - Low Self Employment Income

Post by djpeteski » Mon Oct 30, 2017 7:12 am

Despite being on this site, I am a Fidelity guy. They offer a solo 401K free of charge.

I believe Vanguard does the same, so which every one of those that you like is awesome.

Many other providers will charge you 400-1000 per year to administer the same thing. Quite a nice savings going with Vanguard or Fidelity.

avalpert
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Joined: Sat Mar 22, 2008 4:58 pm

Re: Solo 401k Question - Low Self Employment Income

Post by avalpert » Mon Oct 30, 2017 7:35 am

djpeteski wrote:
Mon Oct 30, 2017 7:12 am
Despite being on this site, I am a Fidelity guy. They offer a solo 401K free of charge.

I believe Vanguard does the same, so which every one of those that you like is awesome.

Many other providers will charge you 400-1000 per year to administer the same thing. Quite a nice savings going with Vanguard or Fidelity.
All the big brokerages offer a free plan - some are better fits for different people. Vanguard's doesn't allow rollovers and you have to use investor share funds, Fidelity's doesn't allow Roth accounts or loans.

If those still fit your needs great, if not look at other options at TDA, Etrade or Schwab. Vanguard and Fidelity are far from special in this space.

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