Have You Set up Your Solo 401(k) Plan for 2007?
Now that I’m back doing strategies again, I’m starting to see even more clearly just why the Solo 401(k) plan may be one of the best tax-planning tools to come along in years!
At our recent Pre-Emptive Tax Strategies seminar in Phoenix, we were lucky enough to have Tom Anderson, the founder and CEO of Pensco Trust Company, as our afternoon speaker. I am always grateful when Tom can find the time in his busy schedule to come to our events and speak to seminar attendees - his depth of knowledge regarding pensions and self-directed pension investing is absolutely phenomenal.
Tom talked quite a bit about the Solo 401(k) and Solo Roth 401(k) plans, and how they can benefit small business owners unlike anything other kind of pension vehicle. The contribution limits are high - $45,000 per person in 2007 in total, with up to $15,500 coming directly from your pre-tax salary. Once your plan has been funded, you can then use that money to invest in real estate, businesses, REITs - just about anything short of life insurance and collectibles. Solo 401(k) plans are allowed to make and receive loans from independent third parties, plus they aren’t subject to UDFI (unrelated debt-financed income tax) on the profits generated from borrowed funds!
If you are a small business owner meeting the following criteria, this may be one of the best tools you have to save for your future and pay less taxes today:
- You must have a business where you receive either W-2 or 1099 income (in other words, you must have a salary or some kind of active income)
- You and your spouse must be the only owners of the business
- The business cannot have any employees (other than you and your spouse) who work more than 1,000 hours per year
If you have been thinking about setting up a Solo 401(k) plan in your business, don’t delay! Although you have until the end of the year to get the paperwork done, you can’t contribute any salary before your plan is set up. So, waiting until December 15th to set up your plan, for example, means you can only contribute salary paid between the 15th and the 31st of December.
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I have a full-time job where I’m paid around 200K in W-2 wages and where I max out on the employee deferral portion (15K) of my employer-sponsored 401K.
I also have a part-time business (S-Corp) which has net-income of 50K.
How should I distribute the net income of the S-Corp?
1) Should I pay myself a salary, and use the salary to contribute to the profit sharing portion of a Solo 401K? Will the solo 401K deductions compensate for the increased taxes (self-employment taxes)?
2) Should I simply allow the net income to pass through to my K-1 to avoid paying self-employment taxes, but with no 401K deductions?
I have an online workshop this month on First Class Lounge on salary from an S Corp and a C Corp. This is an area that the IRS is paying very close attention to, so I strongly urge you to go to the FCL and watch this OLW.
That should be the first question. How much salary do I have to take from this S Corp? Then, from that, determine how much to put in your pensioon plan.
If you’re not a member of FCL yet, you can get the first 30 days free. I hope you stay, especially since it’s less than $10/month with online workshops every week, 2 Special Reports per month and 10% off on products. But, even if you don’t stay, for sure watch this workshop. It’ll help you with your question in more depth than I can do in a comment on the blog.
BTW Great Question!
I’ve been reading a lot about the solo 401k plans. Sounds like it is a great option for our situation. I am the sole employee of my husband’s sole proprietorship. I’ve read how there are 2 types of contributions: employer profit sharing contributions up to 20% of compensation and employee elective salary deferral up to $15,500.
My questions are…
Can my husband make a profit sharing contribution into the solo 401k plan on my behalf (up to 20% of my compensation) and then deduct it on Schedule C line 19??
Also, does the profit sharing percentage have to be the same for both me & my spouse (ie can he contribute 20% of my salary and not make a contribution on his behalf?) Is it possible to just make a flat profit sharing contribution of $5000 for each of us?