Solo-401k interaction with employer sponsored 401k. Limits of contribution from Schedule C income
Alright, team!   I found answers to part 1) and part 2) that I've quote below, but still need help with 3).  The facts in the article below seem to point to the ability for the LLC to contribute profit sharing of up to 25% of the wages it paid SE tax on.  What part of the SE tax is that?  I assume the spirit of the law is to only allow the 25% on the taxable portion of the income, but given that I would have crossed the SS portion of SE tax, I am not 100%.  (From http://www.sensefinancial.com/services/solo401k/solo-401k-contribution/) Sole Proprietorship Employee Deferral The owner of a sole proprietorship who is under the age of 50 may make   employee deferral contributions of as much as $17,500 to a Solo 401(k)   plan for 2013 (Those 50 and older can tack on a $5,500 annual catch-up   contribution, bringing their annual deferral contribution to as much   as $23,000). Solo 401k contribution deadline rules dictate that plan   participant must formally elect to make an employee deferral   contribution by Dec. 31. However, the actual contribution can be made   up until the tax-filing deadline.  Pretax and/or after-tax (Roth)   funds can be used to make employee deferral contributions. Profit Sharing Contribution A sole proprietorship may make annual profit-sharing contributions to   a Solo 401(k) plan on behalf of the business owner and spouse.   Internal Revenue Code Section 401(a)(3) states that employer   contributions are limited to 25 percent of the business entity’s   income subject to self-employment tax. Schedule C sole-proprietors   must base their maximum contribution on earned income, an additional   calculation that lowers their maximum contribution to 20 percent of   earned income. IRS Publication 560 contains a step-by-step worksheet   for this calculation. In general, compensation can be defined as your   net earnings from self-employment activity.  This definition takes   into account the following eligible tax deductions: (1) the deduction   for half of self-employment tax and (2) the deduction for   contributions on your behalf to the Solo 401(k) plan.  A business   entity’s Solo 401(k) contributions for profit sharing component must   be made by its tax-filing deadline. Single Member LLC Employee Deferral The owner of a single member LLC who is under the age of 50 may make   employee deferral contributions of as much as $17,500 to a Solo 401(k)   plan for 2013 (Those 50 and older can tack on a $5,500 annual catch-up   contribution, bringing their annual deferral contribution to as much   as $23,000). Solo 401k contribution deadline rules dictate that plan   participant must formally elect to make an employee deferral   contribution by Dec. 31. However, the actual contribution can be made   up until the tax-filing deadline.  Pretax and/or after-tax (Roth)   funds can be used to make employee deferral contributions. Profit Sharing Contribution A single member LLC business may make annual profit-sharing   contributions to a Solo 401(k) plan on behalf of the business owner   and spouse. Internal Revenue Code Section 401(a)(3) states that   employer contributions are limited to 25 percent of the business   entity’s income subject to self-employment tax. Schedule C   sole-proprietors must base their maximum contribution on earned   income, an additional calculation that lowers their maximum   contribution to 20 percent of earned income. IRS Publication 560   contains a step-by-step worksheet for this calculation. In general,   compensation can be defined as your net earnings from self-employment   activity. This definition takes into account the following eligible   tax deductions: (i) the deduction for half of self-employment tax and   (ii) the deduction for contributions on your behalf to the Solo   401(k).  A single member LLC’s Solo 401(k) contributions for profit   sharing component must be made by its tax-filing deadline.
"Generally if you need to tap into your retirement for the house - you probably shouldn't buy the house. But that's your call. There are several things you could do. Sue your CPA ""friend"" for malpractice. Especially if there's any actual proof of that stupid suggestion. Check with your 401k administrator about home-purchase loan from the 401k. You'll be borrowing your own money, and repaying yourself back with interest, but it will be tax free and with no penalties. Keep in mind: if you cannot repay the loan, or you leave your employer without repaying it in full - the remaining balance will be considered withdrawal and you'll pay income taxes + 10% penalty on it. If you have an IRA, you can withdraw up to 10K without penalty if this is your first house (i.e.: you didn't own a house in the last 3 years), and is going to be your primary residence. You'll still pay taxes on the 10K. But, this is not available for 401k plans. You can request equal payments distribution calculated based on your life expectancy (This is the infamous 72(t)(2) distribution, even though many of the exceptions are in the IRC 72(t)(2). This in particular is 72(t)(2)(A)(iv)). Here's the full list of exceptions. Note that even if you're willing to pay the 10% penalty, many 401k plans do not allow distributions as long as you're still employed with the sponsoring employer. If you take a hardship distribution from your 401k (if it even allows it), you'll be prohibited from contributing for 6 months, and your employer will be prohibited from contributing on your behalf as well. I.e.: not only you take out your savings, you'll be barred from saving back. Also, in the same FAQ, it tells you that the hardship distribution can only include the amounts up to the original contributions (less whatever distributions already made), and not earnings or match. I.e.: it may actually be much less than the 40K you're counting on." There are several things being mixed up in the questions being asked. The expense ratio charged by the mutual fund is built into the NAV per share of the fund, and you do not see the charge explicitly  mentioned as a deduction  on your 401k statement (or in the statement received from the mutual fund in a non-401k situation). The expense ratio is listed in the fund's prospectus, and should also have been made available to you in the literature about the new 401k plan that your employer is setting up. Mutual fund fees (for things like having a small balance, or for that matter, sales charges if any of the funds in the 401k are load funds, God forbid) are different. Some load mutual funds waive  the sales charge load for 401k participants, while some may not. Actually, it all depends on how hard the employer negotiates with the 401k administration company who handles all the paperwork and the mutual fund company with which the 401k administration company negotiates.  (In the 1980s, Fidelity Magellan (3% sales load) was a hot fund, but my employer managed to get it as an option in our plan with no sales load: it helped that my employer was large and could twist arms more easily than a mom-and-pop outfit or Solo 401k plan could). A long long time ago in a galaxy far far away, my first ever IRA contribution of $2000 into a  no-load mutual fund resulted in a $25 annual maintenance fee, but the law allowed the payment of this fee separately from the $2000 if the IRA owner wished to do so. (If not, the $25 would reduce the IRA balance (and no, this did  not count as a premature distribution from the IRA). Plan expenses are what the 401k administration company charges the employer for running the plan (and these expenses are not necessarily peanuts; a 401k plan is not something that needs just a spreadsheet -- there is lots of other paperwork that the employee never gets to see). In some cases, the employer pays the entire expense as a cost of doing business; in other cases, part is paid by the employer and the rest is passed on to the employees.  As far as I know, there is no mechanism for the employee to pay these expenses outside the 401k plan (that is, these expenses are (visibly) deducted from the 401k plan balance). Finally, with regard to the question asked: how are plan fees divided among the investment options? I don't believe that anyone other than the 401k plan administrator or the employer can answer this. Even if the employer simply adopts one of the pre-packaged plans offered by a big 401k administrator (many brokerages and mutual fund companies offer these), the exact numbers depend on which pre-packaged plan has been chosen. (I do think the answers the OP has received are rubbish). "when you contribute to a 401k, you get to invest pre-tax money. that means part of it (e.g. 25%) is money you would otherwise have to pay in taxes (deferred money) and the rest (e.g. 75%) is money you could otherwise invest (base money).  growth in the 401k is essentially tax free because the taxes on the growth of the base money are paid for  by the growth in the deferred portion.  that is of course assuming the same marginal tax rate both now and when you withdraw the money. if your marginal tax rate is lower in retirement than it is now, you would save even more money using a traditional 401k or ira. an alternative is to invest in a roth account (401k or ira). in which case the money goes in after tax and the growth is untaxed.  this would be advantageous if you expect to have a higher marginal tax rate during retirement. moreover, it reduces tax risk, which could give you peace of mind considering u.s. marginal tax rates were over 90% in the 1940's. a roth could also be advantageous if you hit the contribution limits since the contributions are after-tax and therefore more valuable. lastly, contributions to a roth account can be withdrawn at any time tax and penalty free. however, the growth in a roth account is basically stuck there until you turn 60. unlike a traditional ira/401k where you can take early retirement with a SEPP plan. another alternative is to invest the money in a normal taxed account.  the advantage of this approach is that the money is available to you whenever you need it rather than waiting until you retire.  also, investment losses can be deducted from earned income (e.g. 15-25%), while gains can be taxed at the long term capital gains rate (e.g. 0-15%). the upshot being that even if you make money over the course of several years, you can actually realize negative taxes by taking gains and losses in different tax years. finally, when you decide to retire you might end up paying 0% taxes on your long term capital gains if your income is low enough (currently ~50k$/yr for a single person). the biggest limitation of this strategy is that losses are limited to 3k$ per year. also, this strategy works best when you invest in individual stocks rather than mutual funds, increasing volatility (aka risk). lastly, this makes filing your taxes more complicated since you need to report every purchase and sale and watch out for the ""wash sale"" rules. side note: you should contribute enough to get all the 401k matching your employer offers.  even if you cash out the whole account when you want the money, the matching (typically 50%-200%) should exceed the 10% early withdrawal penalty." The general advise is to contribute to the 401K up to the match limit. Then put money into a Roth IRA. Then put the rest into the 401K above the match. Yes you can have an IRA and a 401K. You can even have Roth and non-Roth versions. You do have to watch the limits, and exclusions, but there is nothing stopping you from contributing to multiple types in one year. Over a long career you may find your self with all the possible types of accounts.  When you re-qualify for the company 401K, there is no need to roll over the IRA money into the 401K. Just keep the IRA. "The limit on SEP IRA is 25%, not 20%.  If you're self-employed (filing on Schedule C), then it's taken on net earning, which in your example would be 25% of $90,000. (https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people) JoeTaxpayer is correct as regards the 401(k) limits.  The elective deferrals are per person - That's a cap in sum across multiple plans and across both traditional and Roth if you have those.  In general, it's actually across other retirement plan types too - See below. If you're self-employed and set-up a 401(k) for your own business, the elective deferral is still aggregated with any other 401(k) plans in which you participate that year, but you can still make the employer contribution on your own plan. This IRS page is current a pretty good one on this topic:  https://www.irs.gov/retirement-plans/one-participant-401k-plans Key quotes that are relevant: The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both: •Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:  ◦$18,000 in 2015 and 2016, or $24,000 in 2015 and 2016 if age 50 or over; plus •Employer nonelective contributions up to:  ◦25% of compensation as defined by the plan, or ◦for self-employed individuals, see discussion below It continues with this example: The amount you can defer (including pre-tax and Roth contributions) to all your plans (not including 457(b) plans) is $18,000 in 2015 and 2016. Although a plan's terms may place lower limits on contributions, the total amount allowed under the tax law doesn’t depend on how many plans you belong to or who sponsors those plans. EXAMPLE Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2015. He deferred $18,000 in regular elective deferrals plus $6,000 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2015 were $36,500. This is the maximum that can be contributed to the plan for Ben for 2015. A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan. He must consider the limit for all elective deferrals he makes during a year. Notice in the example that Ben contributed more that than his elective limit in total (his was $24,000 in the example because he was old enough for the $6,000 catch-up in addition to the $18,000 that applies to everyone else).  He did this by declaring an employer contribution of $12,500, which was limited by his compensation but not by any of his elective contributions. Beyond the 401(k), keep in mind that elective contributions are capped across different types of retirement plans as well, so if you have a SEP IRA and a solo 401(k), your total contributions across those plans are also capped.  That's also mentioned in the example. Now to the extent that you're considering different types of plans, that's a whole question in itself - One that might be worth consulting a dedicated tax advisor.  A few things to consider (not extensive list): As for payroll / self-employment tax: Looks like you will end up paying Medicare, including the new ""Additional Medicare"" tax that came with the ACA, but not SS: If you have wages, as well as self-employment   earnings, the tax on your wages is paid first.   But this rule only applies if your total earnings   are more than $118,500. For example, if you   will have $30,000 in wages and $40,000 in selfemployment   income in 2016, you will pay the   appropriate Social Security taxes on both your   wages and business earnings. In 2016, however,   if your wages are $78,000, and you have $40,700   in net earnings from a business, you don’t pay   dual Social Security taxes on earnings more   than $118,500. Your employer will withhold   7.65 percent in Social Security and Medicare   taxes on your $78,000 in earnings. You must   pay 15.3 percent in Social Security and Medicare   taxes on your first $40,500 in self-employment   earnings and 2.9 percent in Medicare tax on the   remaining $200 in net earnings. https://www.ssa.gov/pubs/EN-05-10022.pdf Other good IRS resources:" "It doesn't generally matter, and I'm not sure if it is in fact in use by the IRS other than for general statistics (like ""this year 20% of MFJ returns were with one spouse being a 'homemaker'""). They may be able to try and match the occupation and the general levels and types of income, but for self-employed there's a more precise and reliable field on Schedule C and for employees they don't really need to do this since everything is reported on W2 anyway. So I don't think they even bother or give a lot of value to such a metric. So yes, I'm joining the non-authoritative ""doesn't matter"" crowd." "That's an example of the Act applying to an adviser to a fund, not a fund being exempt from the Act.  An adviser to a 3(c)7 fund in this case is taking advantage of a safe harbor pertaining to performance-based compensation set forth in the Act.  The reasoning is that a 3(c)7 fund will by definition most likely be comprised of ""qualified clients."" The prohibition does apply to other private funds - such as 3(c)1 funds.  To the extent that their investors are not ""qualified clients,"" they are unable to charge a performance-based fee." "Do I understand correctly, that we still can file as ""Married filing   jointly"", just add Schedule C and Schedule SE for her? Yes. Business registration information letter she got once registered   mentions that her due date for filing tax return is January 31, 2016.   Does this prevent us from filing jointly (as far as I understand, I   can't file my income before that date)? IRS sends no such letters. IRS also doesn't require any registration. Be careful, you might be a victim to a phishing attack here. In any case, sole proprietor files a regular individual tax return with the regular April 15th deadline. Do I understand correctly that we do not qualify as ""Family   partnership"" (I do not participate in her business in any way other   than giving her money for initial tools/materials purchase)? Yes. Do I understand correctly that she did not have to do regular   estimated tax payments as business was not expected to generate income   this year? You're asking or saying? How would we know what she expected? In any case, you can use your withholding (adjust the W4) to compensate."