Hello:
I'm curious as to how people in this forum may feel about maximizing employer contributions under a solo 401(k) plan to take advantage of a market downturn. I am an s-corp owner and my spouse is the only other employee, so I am wondering:
a) am I able to make the full employer contribution (25% of compensation) for myself at any time during the year based on my annual salary?
b) am I required to make the same percentage employer contribution to my spouse employee?
c) do people have strong opinions on buying the dip in this manner?
On point (b), I know there are rules for non-spouse employees but I am not clear what the rules are for spouse employees if any.
Thanks in advance!
Solo 401(k) employer contributions during down market
Re: Solo 401(k) employer contributions during down market
I don't know about a) and b) but the answer to c) is yes, people have strong opinions!
I think it's good to invest whatever you can whenever you can do it. So if maxing out your solo 401(k) is doable for you, then I'd do it regardless of market conditions. Those will change, after all. You're not trying to (gasp) time the market are you?
I'm being silly but the evidence is clear no one can consistently and successfully time the market, and the second best strategy is to stay invested.
I think it's good to invest whatever you can whenever you can do it. So if maxing out your solo 401(k) is doable for you, then I'd do it regardless of market conditions. Those will change, after all. You're not trying to (gasp) time the market are you?
I'm being silly but the evidence is clear no one can consistently and successfully time the market, and the second best strategy is to stay invested.
Re: Solo 401(k) employer contributions during down market
The answerto b is yes. You must contribute the same employer contribution percentage to all eligible people on the plan.
For a, the employer contribution is based on eligible compensation. BY making contributions before you've received the compensation, you could put yourself in a position to have made excess employer contributions if you end up not realizing all your expected compensation. This could make things even more complicated considering your spouse's employer contribution and yours must be the same percentage.
For a, the employer contribution is based on eligible compensation. BY making contributions before you've received the compensation, you could put yourself in a position to have made excess employer contributions if you end up not realizing all your expected compensation. This could make things even more complicated considering your spouse's employer contribution and yours must be the same percentage.
Re: Solo 401(k) employer contributions during down market
Just keep making as many contributions as you can, as you earn the money. When the market is going up, it feels good. When it's going down, you're buying at a discount. As long as the market goes up in the long run, you're coming out ahead.
The alternative is worse - holding onto large amounts of cash, waiting for the market to dip (or dip more than it already has). Sometimes that works out, but >50% of the time, the market goes up. Then you're left with a difficult choice - put the cash in at the new higher price, knowing you could/should have bought it cheaper; or keep holding the cash and hope the market goes down again. The higher up it goes, the more it has to dip to get back down below the price when you earned the money. The statistics are very clear that you're likely to get the highest returns by investing the money as soon as you have it.
The alternative is worse - holding onto large amounts of cash, waiting for the market to dip (or dip more than it already has). Sometimes that works out, but >50% of the time, the market goes up. Then you're left with a difficult choice - put the cash in at the new higher price, knowing you could/should have bought it cheaper; or keep holding the cash and hope the market goes down again. The higher up it goes, the more it has to dip to get back down below the price when you earned the money. The statistics are very clear that you're likely to get the highest returns by investing the money as soon as you have it.
Re: Solo 401(k) employer contributions during down market
mega317 wrote: ↑Tue May 24, 2022 3:25 pm I don't know about a) and b) but the answer to c) is yes, people have strong opinions!
I think it's good to invest whatever you can whenever you can do it. So if maxing out your solo 401(k) is doable for you, then I'd do it regardless of market conditions. Those will change, after all. You're not trying to (gasp) time the market are you?
I'm being silly but the evidence is clear no one can consistently and successfully time the market, and the second best strategy is to stay invested.
Time the Market?! Never!
I agree, it's not a good long-term strategy just wondering if it might allow for a decent discount at the moment, all things considered. But of course you and others are right. Conditions can always change.
Re: Solo 401(k) employer contributions during down market
Thank you for the answer on (b)!nolesrule wrote: ↑Tue May 24, 2022 4:17 pm The answerto b is yes. You must contribute the same employer contribution percentage to all eligible people on the plan.
For a, the employer contribution is based on eligible compensation. BY making contributions before you've received the compensation, you could put yourself in a position to have made excess employer contributions if you end up not realizing all your expected compensation. This could make things even more complicated considering your spouse's employer contribution and yours must be the same percentage.