Windfall/Use solo401k for tax savings?

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Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Windfall/Use solo401k for tax savings?

Post by uwbadgers »

We recently sold our rental condo and I cashed a check for 225k......through drive through :) That was the only option obviously these days and made for a fun way to deposit that.

My wife and I are now gradually planning where to disperse this money.

My main question is would opening and depositing in a solo 401k be useful here, tax wise?

———More details:

Married 36/36, with 2 kids.
Income
Her: 200k this year, but variable job, on track for this
Him: 40k
Him LLC: 30k (single member llc)

We maxed HER 401k and both Roth IRA for the year already.

***I do NOT have a 401k through employer.

Retirement savings: 425k
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So my main thought her is would dropping a hefty amount into a solo401k be helpful for tax savings?

I think just through income and rental sale the tax bill is going to be real high for 2020 so trying to bring it down. And also save note for retirement!

Is this possible?

I’ve read the rules for it but can I use ANY money for it? Since I’m single member LLC it just goes on our normal tax return, so all money is the same?

I’ve seen you can do up to 57k?

Or, I’m totally wrong here and missing something.

Shed me some wisdom!

Thank you!

P. S. Let me know if more info is needed as well
User avatar
MP123
Posts: 2272
Joined: Thu Feb 16, 2017 3:32 pm

Re: Windfall/Use solo401k for tax savings?

Post by MP123 »

You can't contribute more than your self employment income which looks like $30K?

But you could contribute $19,500 + 20% of net self employment income.

Unfortunately, although you can still make a contribution for 2019 until July 15th, you would need to have opened the account prior to 12/31/19. But at least you can make a contribution for 2020.

It won't reduce the capital gains tax (if any) you'll owe on the condo sale, but it will reduce your taxable business income.
Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Re: Windfall/Use solo401k for tax savings?

Post by uwbadgers »

Thank you for the reply.

My net llc income currently, 6 months in, is 8k

So 19,600 + 20% of 16k(yearly projection) = 3,200

$22,800?

While thinking about things more I wonder if this would also help us meet the income, well, below the limit, for ROTH IRA contributions.

I feel we may be close to cut off this year?
HomeStretch
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Joined: Thu Dec 27, 2018 3:06 pm

Re: Windfall/Use solo401k for tax savings?

Post by HomeStretch »

uwbadgers wrote: Wed Jul 01, 2020 5:38 pm ... My net llc income currently, 6 months in, is 8k

So 19,600 + 20% of 16k(yearly projection) = 3,200

$22,800? ...
No, the total will be < $16k.

You have to reduce your net earnings from self-employment (s/e) by 1/2 of your self-employment taxes. The maximum employee deferral + employer contribution is $16k (if that’s your net s/e earnings) minus 1/2 of your s/e tax. Your s/e tax rate may be less than 15.3% depending on your W-2 FICA withholding.

Start here then see IRS Publication 560:
https://www.irs.gov/retirement-plans/on ... 401k-plans

ETA: don’t make 100% of your employee/employer contributions to a Solo 401k based on projected s/e earning. Excess employer contributions are subject to a 10% penalty - see SpiritRider’s posts on the subject.
Last edited by HomeStretch on Wed Jul 01, 2020 6:35 pm, edited 1 time in total.
User avatar
MP123
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Re: Windfall/Use solo401k for tax savings?

Post by MP123 »

HomeStretch wrote: Wed Jul 01, 2020 6:14 pm
uwbadgers wrote: Wed Jul 01, 2020 5:38 pm ... My net llc income currently, 6 months in, is 8k

So 19,600 + 20% of 16k(yearly projection) = 3,200

$22,800? ...
No, the total will be < $16k.

You have to reduce your net earnings from self-employment (s/e) by 1/2 of your self-employment taxes. The maximum employee deferral + employer contribution is $16k (if that’s your net s/e earnings) minus 1/2 of your s/e tax. Your s/e tax rate may be less than 15.3% depending on your W-2 FICA withholding.

Start here then see IRS Publication 560:
https://www.irs.gov/retirement-plans/on ... 401k-plans
Correct. My figures above were based on what I understood to be $30k in net earnings from the LLC in the first post.
HomeStretch
Posts: 6214
Joined: Thu Dec 27, 2018 3:06 pm

Re: Windfall/Use solo401k for tax savings?

Post by HomeStretch »

Does spouse’s 401k plan offer a mega Backdoor Roth?
Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Re: Windfall/Use solo401k for tax savings?

Post by uwbadgers »

I have zero knowledge of what/how that works, besides seeing it around here.

What would I look for in her plan to find out?
HomeStretch
Posts: 6214
Joined: Thu Dec 27, 2018 3:06 pm

Re: Windfall/Use solo401k for tax savings?

Post by HomeStretch »

A 401k mega Backdoor Roth (MBR) won’t reduce your spouse’s 2020 W-2 taxable compensation like the traditional 401k employee elective deferral of $19.5k does. But a MBR is useful tax-wise as Roth accounts grow tax free.

BH MBR wiki page: https://www.bogleheads.org/wiki/After-tax_401(k)

Start with the 401k Summary Plan Description to see if the plan allows elective after-tax (non Roth) contributions that can be converted to Roth via an in-plan Roth rollover (to Roth 401k) or in-service distribution (to Roth IRA). Spouse can also check with the plan provider or HR. If yes, the 2020 IRS limit for 401k contributions is $57k (= employee deferral $19.5k + employer contributions + employee after-tax contributions).
lakpr
Posts: 7438
Joined: Fri Mar 18, 2011 9:59 am

Re: Windfall/Use solo401k for tax savings?

Post by lakpr »

uwbadgers wrote: Wed Jul 01, 2020 6:42 pm I have zero knowledge of what/how that works, besides seeing it around here.

What would I look for in her plan to find out?
Look for the phrase "after tax" or "after-tax" (with the hyphen) in the Summary Plan Description document. Usually these are provided to you in a PDF document, downloadable via an intranet link. Within the context of where you find this phrase, just make sure they are not talking about making Roth-401k contributions.
Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Re: Windfall/Use solo401k for tax savings?

Post by uwbadgers »

I didn’t seem to find anything that referred to that.

She has 401k, Roth 401k access, but didn’t see after after tax options listed.
Topic Author
uwbadgers
Posts: 86
Joined: Mon Aug 25, 2014 3:36 pm

Re: Windfall/Use solo401k for tax savings?

Post by uwbadgers »

Bringing this one back up after some time......I just finished officially opening a Vanguard Solo 401k.

I think I am understanding my contribution limits, but please correct if wrong.

My main goal here is to put as much pre-tax money into this retirement vessel as possible.
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Projected GROSS income for LLC in 2020: 25k
Projected NET income for LLC in 2020: 15k

Planned contributions:

Total Contributions: $16,455

Employer Contribition = $3,750 (25% of W-2 Income)
Elective Deferral (Net Income - SE tax (15.3%) = $12,705 (15,000 * 84.7% = 12,705)
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Does this appear right for my maximum? But I can't contribute more than my net profit, is that right?

Mainly I'm limited due to a lower net income than allowable contributions, right?
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This is more confusing than I'd like :)

My Vanguard account isn't quite live yet as I just did the forms an hour ago, perhaps it will guide me more?

Thank you!
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