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Contributions

Solo 401k contribution from self-employment income

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Is it correct that a Solo 401k only allows me to contribute based on my self-employment income?

Answer:

Yes. The Solo 401k plan is an employer-sponsored plan. The employer is the plan sponsor which you used to adopt the plan.  This is your self-employment, either you as sole-proprietor or a business entity (LLC, corporation, etc).

All contributions to your Solo 401k must come from the business earnings of your self-employment. You cannot contribute any additional funds from full-time employment W2 wages elsewhere or any other funds not related to the sponsoring entity.

In additional to large contributions limits from your self-employment income, you are able to roll over existing funds from other qualified retirement plans such as a Traditional or SEP IRA, 403B, 401k, etc.

Contributions from my corporation

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Can you please explain how to make contributions to my 401k from my corporation. Can I get paid by the corporation as an independent contractor via 1099 and then claim the state taxes on my personal return or do I need to do the payroll deductions and submit them to the state?

Answer:

Since your 401k plan is sponsored by the corporation, all employee elective deferrals must be made through the payroll.

Profit sharing contributions are made by the company and are 100% deductible.

Since you own a corporation you must take reasonable salary, please consult your CPA or tax advisor for details. Be sure to inform your payroll service provider (payroll company or your CPA) that you intend to make contributions into the 401k. Contributions made by the employee must be reflected on the payroll and the funds must be deposited to 401k account within 7 days of payroll.

Below is an example of a paystub showing the deduction from wages, into the Roth 401k:

Pay-stub-sample

Below is an example of the W2 showing $18,000 contribution made to a Roth 401k in the box 12a:

(In the example below there are Roth contributions (Box 12a code AA). In this case, the amount would be included in box 1. If the deferrals are pre-tax the code used in box 12a would be "D" and then amount in box 1 would be reduced by the amount in box 12a.)

W2-sample

Contributions to both SEP and Solo 401K in the same year

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Does the IRS allow contributions to both SEP IRA and Solo 401K in the same year?

Answer:

Yes, you may contribute into the SEP IRA and Solo 401K plan in the same year. However, you cannot exceed limitations of contributions in total.

The Solo 401K plan is more advantageous and allows you to maximize your contributions quicker since it includes both an employee deferral and a profit sharing component. The SEP IRA only has a profit sharing component. Most individuals will stop utilizing the SEP IRA and use only the Solo 401K plan. There is no reason to keep the SEP IRA open.

Contributing from multiple businesses

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I own three LLCs (LLC #1, LLC #2, and LLC #3). My Solo 401k is adopted by LLC #3. However, LLC #1 generates significant income. Can I make contributions to the Solo 401k from LLC #1?

Answer:

No.  Contributions to your Solo 401k must come from the business that adopted it.

If LLC #1 generates most of the income, then you may want to restate your Solo 401k so that LLC #1 becomes the adopting employer of the plan. For assistance in restating your plan, please contact your Account Manager with Sense Financial.

Another option would be to set up a holding company for the three separate companies. The holding company would own the other companies. The other companies would then be subsidiary companies, doing business while being owned by the holding company. For this option, the Solo 401k would need to be restated with the holding company as the adopting employer of the plan.

The subsidiary companies need to be established as pass-through entities; meaning they don’t pay taxation at their own level. The subsidiaries would pass the earnings up to the parent company.

For example, the subsidiary company could be structured as a single-member LLC. The LLC would have one owner or one member which would be the parent company. As a single-member LLC, the subsidiary company would not have to file a tax return as a pass-through entity. The IRS instructs pass-through entities to be disregarded for tax purposes.

For further clarification, please consult your CPA or tax advisor.

Can my investment income be contributed to a Solo 401(k)?

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Answer:

Most likely your investment income is passive income.  Passive income cannot be contributed to the Solo 401(k).  Contributions to any retirement account must come from the earned income of the business sponsoring the 401k plan.

You may be able to designate all or a portion of your investment income as earned income, however. Please consult with your CPA. Your CPA may make this determination based on the management or administrative work you perform for your investments.

Contribute to Solo 401k from multiple companies

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I want to be able to contribute to my Solo 401k from multiple companies to maximize the contribution potential. How can I do this?

Answer:

To do this, general opinion is that you can set up a holding company for the separate companies and make the holding company the adopting company for the Solo 401k. A holding company is usually a company that doesn’t do any business with anyone, it just owns other companies. The trick to making this work is of course to have the other companies which would be called, “Subsidiary companies” – the companies that go out there and do business and are owned by the holding company.

Those need to be pass-through entities; meaning that they don’t pay taxation at their own level, they just pass through the earning up to the parent company. So LLCs are pass through entities, and if you use LLCs, then one other benefit you’ll get is that you’ll have the subsidiary company structured as an LLC and it only has one owner or one member which would be the parent company. It would be a single member LLC. If you have a single member LLC, it doesn’t even have to file a tax return in the first place. Single member LLCs the IRS instructs to be disregarded for tax purposes. For further clarification, please consult your CPA or tax/legal advisor.

Having a current employer’s 401k plan and a Solo 401k plan

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Does my current employer’s 401k plan have any effect on my Solo 401k plan, such as the contribution limit?

Answer:

Please see our Contribution Calculator for current contribution limits and an explanation of how to calculate them.

In your Solo 401k plan, there are two types of contributions:

  • Employee contributions (salary deferral)
  • Employer contributions (profit sharing)

The employee contribution limit is per person, not per plan.  This means that any contributions made towards your employer’s 401k plan as an employee will reduce the amount you can contribute to your Solo 401k as an employee for that year.

For example, if you are over the age of 50, then your maximum contribution limit as an employee is $24,000 for 2017.  If you contribute $10,000 to your employer’s 401k plan, you can only contribute up to $14,000 as an employee to your Solo 401k plan.

As always, please consult your CPA or tax advisor.