I enjoy being my own boss, especially after I learn how much American businesses are supported financially from the perspective of tax efficiency.
I was also happy to learn more about the awesome flexibility, options, and much higher limits of tax-advantaged savings available to a business owner rather than an employee.
What is my business?
Aside from my W2 day job (sometimes night, too, sometimes around the clock… 24 hour shift) as a radiology resident, I also receive 1099 income from my tutoring/consultation business, book royalties, and this blog (even though the bog is in the deep red in terms of net profit.)
Why do I want to learn about business owner tax-advantaged savings?
After I max out the 18k limit of 401k at my residency program and the 5.5k Roth IRA, I need more tax-advantaged saving space. I much prefer to put money in a tax efficient vehicles such as individual/solo 401k, SEP-IRA, SIMPLE IRA discussed in this post, than a taxable brokerage account (although I currently do have about $1,200 play money in a free, fee-less, mobile app called Robinhood).
Self-employed individuals and businesses employing only the owner, partners and spouses have several options for tax-advantaged savings: an individual 401(k) plan, a SEP IRA, a SIMPLE IRA or a profit-sharing plan. Each option has distinct features and amounts that can be contributed to the plan each year. Use the self-employed 401(k) calculator to estimate the potential contribution that can be made to an individual 401(k) compared to profit-sharing, SIMPLE or SEP plans for 2008.
Read more: http://www.bankrate.com/calculators/retirement/self-employed-401-k-calculator.aspx#ixzz44izFG2jD
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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:
- 2015: $18,000 or $24,000 if age 50 or over; and
Employer non-elective contributions up to:
- 25% of compensation as defined by the plan, or for self-employed individuals, see discussion below.
- One can contribute to an IRA, move it into a 401(k) account, and contribute in-full to 401(k). However, not all of the contribution would be a deductible contribution.
- 401(k) employer may make an in-kind contribution to the plan. All other rules still apply – i.e., a disqualified persons may not be securing the loan.
- Employer matching or non-elective contributions are always made “pre-tax.” Employers cannot make Roth contributions.
I’m a big fan of putting 1099 money into a Solo 401(k). I think most people don’t even realize that money that you earn from even simple things like driving for Uber or doing Postmates can be saved away in an self-employed retirement account.
For a future high income earner, I think a Solo 401(k) makes the most sense because it allows you to still do a backdoor Roth in the future without messing with the pro-rata requirements.
As an added benefit for myself, I can actually contribute the entirety of my side hustle income because my regular employer plan is a 457(b), rather than a 401(k). In other words, even if I max out my 457(b), I can still put up to 18,000 in 1099 income into a Solo 401(k) as my employee contributions (I haven’t quite figured out a way to make $18k in side hustle income, but it still allows me to put a good amount away).
totally agree. 401k for dog walking even, anything 1099.
your plan sounds like a great plan, thanks for sharing!