Max pre-tax retirement contributions for side biz?

RWC75

Level 2 Member
So I've got my reselling biz up and running, and while things are much more difficult this year than last I've been doing well enough to put some of it away in retirement accounts. Anticipating this option, and reading about backdoor / super Roth accounts last year on MMM and other sites, I went ahead and set up a Solo 401(k) last year. I've been fortunate enough to be able to push almost $5k into it over the past 12 months pre-tax, but came across a post / comment about other vehicles potentially allowing up to 53k / 100k per year in pre-tax retirement contributions.

To start with, my wife and I are fortunate enough to be high enough earners with minimal debt, so we're both maxing out our pre-tax 401(k) contributions at our day jobs. That puts us under the $183k limit to be able to make Roth contributions, and I plan to max that as well. I won't likely be able to get under the income to contribute to a regular IRA in a tax-deductible manner unless I can get a LOT more deductions or push a lot more funds into pre-tax accounts.

I've got the Solo 401(k) set up so that I can push 20% of my business revenue into it pre-tax as an employer contribution, but won't be able to push any more pre-tax as an employee contribution since I've been maxing it at my regular job. Adding my wife as an employee doesn't seem to be able to increase the amount I can shelter in pre-tax retirement accounts, since I'd basically be splitting that 20% into two accounts rather than increasing the maximum I can push volume-wise.

What else can I do to increase my pre-tax retirement contributions?
 

Matt

Administrator
Staff member
you are describing a SEP not a solo k methinks. It's the 20% comment.. But that could be coincidence...
 

RWC75

Level 2 Member
No, Solo 401(k). Can contribute 25% of salary as a pre-tax employer contribution. Since I'm still organized as a sole proprietorship, essentially all of the business profit can be considered salary. So taking 80% of profit as "salary" means I can push 20% of gross (25% of net) pre-tax.
 

RWC75

Level 2 Member
Have you heard of an SCorp with an Accountable Plan?
Just read your article actually, and it's definitely something I'm going to be looking into for 2017. I'll need to decide where to set up my LLC (currently resident in DC, which isn't the most favorable business environment), but I think I've got enough time to look into it. From what I understood from your article, it looks like I can do pre-tax reimbursements of expenses, that don't count as income, correct?
 

Matt

Administrator
Staff member
Just read your article actually, and it's definitely something I'm going to be looking into for 2017. I'll need to decide where to set up my LLC (currently resident in DC, which isn't the most favorable business environment), but I think I've got enough time to look into it. From what I understood from your article, it looks like I can do pre-tax reimbursements of expenses, that don't count as income, correct?
Yep, but not through just an LLC, need to be an S or C corp and your corp reimburses you (the employee). This might be smarter in your case because right now you are creating tax (80% salary) in order to reduce tax (20%).

I'd rather just not pay the tax.

When things get bigger - you can look at the $100K+ deferral options. I would suggest looking at integrating 401(k) with Cash Balance plans for that.
 

stlcole

Level 2 Member
I just found this thread after starting one rather similar. Is there a recipe / resource which helps detail the most cost effective way to set up a Solo 401k?
 

RWC75

Level 2 Member
Interesting points. I suppose my focus here was maximizing the amount in the various retirement account options, rather than minimizing tax...

So I guess the way I'm looking at it is something like the following:

For the sake of argument, let's assume 10k of side business income. My goal is to maximize what I can put in tax-deffered and tax-exempt retirement accounts. We assume I'm maxing my 18k in employee pre-tax contributions and putting 5k into a Roth separately based on my salary from my regular job.

Of that 10k, I can push 2k to a tax-deferred Solo 401(k) as a pre-tax employer contribution.

On the remaining 8k, I pay about 45% in self employment, state and federal taxes, leaving 4.4k, which can then be pushed to my Solo 401(K) as an after-tax employee contribution and rolled into my Roth IRA. In total, I get 6.4k in retirement accounts by spending 3.6k in taxes.

If I go the route of S Corp, I instead take 5k in salary. I push 1k as an employer contribution, pay 2250 in taxes on the salary leaving 2750 which gets rolled into my 401k. The remaining 4k gets pushed out as a distribution, which I pay 600 in taxes. This ends up with 3750 in retirement accounts, 3400 in after-tax income from a distribution, and 2850 in taxes paid.

So by paying $750 more in taxes I get to push an extra $2650 into tax-advantaged retirement accounts. Alternatively, I could take the $3400 after-tax distribution from the S Corp and invest that into taxable retirement / investment accounts, giving me $7150 total invested vs. $6400... though the gains on some of that would be taxable. Not certain how to weigh that tradeoff, but it's definitely one to consider, especially as I scale up the business. Given that the "salary" from the business isn't huge compared to my regular income I don't know that the impact to my recorded social security income would be significant in the grand scheme of things.

You've definitely given me something to think about, that's for sure. I'll need to look into the administrative / accounting / etc burdens of running an S corp to see if it makes sense to change business structures to take advantage.
 

RWC75

Level 2 Member
I just found this thread after starting one rather similar. Is there a recipe / resource which helps detail the most cost effective way to set up a Solo 401k?
I contacted Nora Bethman of NEBS, who walked through the setup process, did all the plan documents and all that, for about $700 all in. They offer Third Party Administrator services for $400 per year.

https://thefinancebuff.com/after-tax-contributions-in-solo-401k.html

I'd do a good bit of research before diving in, but I considered it worth it just to decrease the load on myself.
 

Matt

Administrator
Staff member
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