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Solo 401(k) Add the Spouse question
Posted on 12/22/14 at 2:12 pm
Posted on 12/22/14 at 2:12 pm
Short Story: Own my own LLC (single member) and have a Solo 401(K). This allows me, if earnings are high enough to put away up to $52k a year into the 401(K).
However, if wifey contributes to the LLC, I can pay her a wage and she can contribute into also, raising the max allowed to $104K a year.
I have been contemplating this, but my hesitation is as follows:
The 401K contribution is post payroll tax. If I keep the money in my name then that is 2.8% give or take. However, if I allocate to her the first $108K (or whatever) is at 15.2%. Note, that 12.4% increment is a permanent difference.
I just question whether it is worth the 12.4% fee up front to defer the income tax on this money. What say the money board geniuses.
And yes I know, OT problem.
However, if wifey contributes to the LLC, I can pay her a wage and she can contribute into also, raising the max allowed to $104K a year.
I have been contemplating this, but my hesitation is as follows:
The 401K contribution is post payroll tax. If I keep the money in my name then that is 2.8% give or take. However, if I allocate to her the first $108K (or whatever) is at 15.2%. Note, that 12.4% increment is a permanent difference.
I just question whether it is worth the 12.4% fee up front to defer the income tax on this money. What say the money board geniuses.
And yes I know, OT problem.
3
Posted on 12/22/14 at 2:47 pm to igoringa
Add a section 105 health reimbursement plan instead, combined with a high deductible health plan, which allows you to pay 100% of all medical expenses (high deductible and all premiums) and contribute the maximum to an hsa each year as your spouse's sole source of remuneration.
A section 105 reimbursement plan is not subject to payroll tax or income tax plus you get the triple tax advantage of the HSA contributions, which can act like another Roth vehicle.
Between the full amount of the health insurance premiums, all expenses within the $2,500+ deductible plus coinsurance up to the OOP maximum and the $6,550 HSA contribution, you're probably close to the amount you'd allocate to the $18,000 payroll deferral and payroll tax.
A section 105 reimbursement plan is not subject to payroll tax or income tax plus you get the triple tax advantage of the HSA contributions, which can act like another Roth vehicle.
Between the full amount of the health insurance premiums, all expenses within the $2,500+ deductible plus coinsurance up to the OOP maximum and the $6,550 HSA contribution, you're probably close to the amount you'd allocate to the $18,000 payroll deferral and payroll tax.
This post was edited on 12/22/14 at 2:50 pm
Posted on 12/22/14 at 5:04 pm to GoIrish02
GoIrish02 - Thanks so much for this guidance.
Given I am a sole member LLC, and thus only person eligible will be my wife, I assume I can easily 'self administer' as HIPPA, privacy and stuff is not an issue?
I see some canned HRA plan docs online for $299. Looks like it is pretty straight forward?
Can it be 'retroactive'. Ie can I set up tomorrow for a plan for calendar 2014? Daddy paid for some braces this year
Given I am a sole member LLC, and thus only person eligible will be my wife, I assume I can easily 'self administer' as HIPPA, privacy and stuff is not an issue?
I see some canned HRA plan docs online for $299. Looks like it is pretty straight forward?
Can it be 'retroactive'. Ie can I set up tomorrow for a plan for calendar 2014? Daddy paid for some braces this year
Posted on 12/23/14 at 12:22 am to igoringa
Yes, must be adopted and set up by 12\31, all expenses for 2014 are eligible. It's just a word document your wife signs and she can submit a medical expense report at an interval you decide.
Find Bradford's tax reduction newsletter online and a sample plan is free when you sign up for the letter. You can get a free 30 day trial subscription too that may give you access. It will have lots of great ideas you can use with IRS citations and pays for itself many times over
Find Bradford's tax reduction newsletter online and a sample plan is free when you sign up for the letter. You can get a free 30 day trial subscription too that may give you access. It will have lots of great ideas you can use with IRS citations and pays for itself many times over
Posted on 12/23/14 at 5:06 pm to GoIrish02
So to make sure I am not stupid - If I set up by by 12/31 I can capture what I spent this year?
Thanks so much for the info!
Thanks so much for the info!
Posted on 12/24/14 at 1:10 am to igoringa
Congratulations, you're not stupid.
Anything you spent on medical expenses this year is reimbursable as long as you set it up during the calendar year.
Good luck!
Anything you spent on medical expenses this year is reimbursable as long as you set it up during the calendar year.
Good luck!
Posted on 12/26/14 at 4:02 am to igoringa
Would anybody mind explaining these numbers? Why would payroll taxes be 2.8% for him and 12.4% for her?
Thanks.
Thanks.
Posted on 12/26/14 at 8:02 am to igoringa
One thing to note, depending upon your income, is that you may not have to give her a huge amount of income in order to get her the $52,000 limit. In some instances, it can be that she only needs to earn $52,000 in income to get that limit.
Where you have the problem is the 25% of covered compensation limit for the employer contribution.
You put in $17,500 for 401k. That leaves you $34,500 as an "employer contribution". Same for her.
$34,500 (you) plus $34,500 (her) equals $69,000. $69,000 is 25% of $276,000 in income.
So if you're making at least $224,000 and you give her $52,000, its enough (though it depends upon if its W-2 wages or if its Self Employment Income - SEI would need to be higher to allow for room to solve down).
As for the better use of your money, I don't know that side of it, but I did have a CPA tell me its essentially $1,500 out of pocket cost for every $10,000 in wages you give to a spouse. So you lose about $7,500 to get tax deferred income of $52,000. Your tax saving is likely much higher than the cost, but it depends upon a lot of other factors, I'm sure.
Where you have the problem is the 25% of covered compensation limit for the employer contribution.
You put in $17,500 for 401k. That leaves you $34,500 as an "employer contribution". Same for her.
$34,500 (you) plus $34,500 (her) equals $69,000. $69,000 is 25% of $276,000 in income.
So if you're making at least $224,000 and you give her $52,000, its enough (though it depends upon if its W-2 wages or if its Self Employment Income - SEI would need to be higher to allow for room to solve down).
As for the better use of your money, I don't know that side of it, but I did have a CPA tell me its essentially $1,500 out of pocket cost for every $10,000 in wages you give to a spouse. So you lose about $7,500 to get tax deferred income of $52,000. Your tax saving is likely much higher than the cost, but it depends upon a lot of other factors, I'm sure.
Posted on 12/26/14 at 8:27 am to Tigerstark
Good point on the 25 percent of income limitation - I have plenty of room (thankfully).
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