solo 401k
by pteam » Sun Apr 13, 2014 8:36 pm
I have a solo 401k for my wife and I. I want to max out each 401k to the maximum allowed 52k each for a total of 104k. We have two businesses one for myself that will fund the 200% match, and a different business for my wife which will fund her 200% match. How much income/profit is needed for each company to be able to contribute the max 200% match which is $34,500 plus the $17,500 personal for a total of $52k each. I mean doesn't the companies have to make a certain amount of income/profit to be able to contribute this much?
Anything else I should be aware of?
Thanks!
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Re: solo 401k
by Spirit Rider » Mon Apr 14, 2014 12:49 am
The identified 200% match does not exist. A solo 401k does not have an employer elective match. It has an employee elective deferral and a employer non-elective profit sharing. The profit sharing max is 25% of compensation, but is calculated differently for a sole proprietor than an S-Corp.
For a Sole Proprietor it is 20% of self-employment income (business profit - 1/2 SE tax). So if the maximum contribution is $34.5K, you would need 172.5K of self-employment income. This would require a business profit of $185.6K.
For a S-Corp it is 25% of W2 wages. So if the maximum contribution is $34.5K, you would need $138K of wages. The Corp would also require the $34.5K for the contribution and $10.6K of employer FICA. So you would need $183.1K of business profit + Unemployment Insurance and maybe workman's comp.
So generally, you need about $185K of business profit to max out the profit sharing.
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Re: solo 401k
by J295 » Mon Apr 14, 2014 12:51 am
Take a look at Fidelity's online calculator in the retirement section on its site.
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Re: solo 401k
by Spirit Rider » Mon Apr 14, 2014 1:16 am
Take J295's advice.
My calculation for the sole proprietor number is incorrect. In my calculation to go from self-employment income to business profit, I was adding back in the 1/2 SE tax. Unfortunately, I was not incorporating the $117K max wage base. The sole proprietor number is more like $182K..
My calculation for the S-Corp is also incorrect. The W2 wage calculation is correct, but I was not incorporating the $117K max wage base to calculate the employer FICA. The employer FICA would be more like $9.25K. The S-Corp number is also more like 182K.
The sole proprietor and the S-Corp require about the same business profit to max out the profit sharing. That is to be expected. The sole proprietor would pay Medicare tax on the $34.5K contribution ($500), but the S-Corp would not. However, the S-Corp would pay UI and depending on the state one, both, or neither might pay WC.
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Re: solo 401k
by pteam » Mon Apr 14, 2014 2:14 am
Ok I'm looking into this. Thank you for your help
Is the business "profit" before the 401k money is subtracted as an expense?
Also our corps are S corps.
The calc at http://www.solo401kcalculator.com shows I need about $145k each to get to the $52k for 401k, Is that not right?
Also if the business has $50k in expenses that means I would need 50k more income?
Also fidelity had several calculators in the retirement section but I didn't see one that pertained to solo 401k. I surely could have missed it
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Re: solo 401k
by DSInvestor » Mon Apr 14, 2014 3:44 am
If you're S-Corps paying W-2 salary, the Solo 401k contribution is easy. It is purely driven by your W-2 salary.
1) Employee salary deferral 17.5K (23K if over age 50).
2) Employer profit share can be 0-25% of W-2 salary.
If you're under age 50, you can max out for 52K if salary is 138K (17.5K + 25% of 138K = 52K)
Don't forget that you can each also contribute to Traditional or Roth IRA.
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