As I am in the process of initiating
this Self-Directed 401K, I thought
of giving you a brief intro about my background and the questions that I have.
I feel this will be helpful for me.
·
This year, I started my own company (S-Corp), a consulting
company of which my wife and I are the only owners and employees.
·
Prior to this, I was a fulltime-employee at a
local company and for this year, I contributed around $4,000 towards former
employer 401K.
·
Both my wife and I take monthly salaries (W2)
through our S-Corp consulting business.
·
I rolled over my previous employer 401K to an
IRA with Chase, which I would like to rollover to my new Self-Directed 401k for
my S-Corporation.
·
My wife also would like to open Self-Directed 401K
and transfer her former employer 401k to it.
·
As part of the Self-Directed 401K, we want to make
annual contributions and also want to explore the Roth-401k.
Questions:
Q1: Since I already contributed to my
former employer’s 401k, am I eligible to contribute to my S-Corporation’s Self-Directed
401k for this year?
ANSWER: As long as you have
not exceeded the annual 401k contribution limit for 2012, you can make Solo
401k contribution for 2012. The limit on contributions to all 401k plans
including Solo 401k (also known as Self-Directed 401k, Individual 401k, Solo K,
Individual K, etc.) for 2012 is $50,000 plus an additional catch-up amount of $5,500 for those age 50 or
older. Note that rollovers and transfers
from IRAs or other 401k plans are not included in this figure as unlimited
amounts can be directly rolled or transferred to Solo 401k.
So if you only contributed, let’s
say, $4,000 to your former employer 401k for 2012, you can make an additional
$46,000 contribution to your Solo 401k for 2012 provided you have the self-employment
income from your S-Corporation to justify this contribution.
Q2: This year’s W2 salary figures from
our self-employed S-corporation for my wife and me is $60,000. Based on this
figure, what would be the maximum Self-Directed 401K employee contribution,
Roth-401K employee contribution and Profit sharing contribution? Also, this $60,000
does not include my previous employer’s salary amount of $75,000.
ANSWER: To calculate the annual Solo 401k contribution for an S- Corporation,
you must base it on W-2 income not pass-through profits.
So if your W-2 income/compensation
for your S-Corporation for which you would open Solo 401k through is $60,000 for tax year 2012, you
would calculate your Solo 401k contribution as follows:
Step 1: Determine
maximum Solo 401k Profit Sharing Contribution (employer contribution) by
multiplying $60,000 by 25%, which = $15,000.
Step 2:
Determine maximum employee contribution (salary deferral) by adding $17,000 to
your maximum Profit Sharing Contribution amount of $15,000 and then subtract
the $4,000 that you already contributed to your former employer’s 401k.
So your maximum Solo 401k contribution
for 2012 based on $60,000 of W-2 income is $28,000.
NOTE: the contribution limits separately apply
to each Solo 401k participant. Therefore, if your wife also generated $60,00 of
W-2 income from the S-corporation she could contribute $32,000 to her Solo 401k
for 2012, assuming she didn’t make contributions to any other 401k for 2012.
Q3: Lastly, can I merge my IRA with
mine and my wife’s Self-Directed 401k or are we required to maintain separate Self-Directed
401k accounts?
ANSWER: Just one Solo 401k Plan would be established for the
S-Corporation, but two separate subaccounts, one for each Solo 401k participant,
would be established to separately account for each participant’s
contributions, rollovers, transfers and gains.
The Roth option is not offer by
all Solo 401k providers so make sure
to first check with the Solo 401k provider that you choose to open Solo 401k
through as to whether or not their Solo 401k plan document allows for Roth Solo
401k contributions. Roth Solo 401k contributions are made up of only the
$17,000 portion known as the employee or salary deferral contributions plus the
catch-up amount of $5,500 for 2012 for those ages 50 or older. Therefore, you
would subtract the $4,000 that you already made to your former employer 401k,
thus leaving you with $13,000 that can be applied as a Roth Solo 401k contribution for tax year 2012. Roth contributions
have to be separately accounted for; therefore, a separate account would be
setup under the same Solo 401k plan for your business and labeled Roth Solo
401k.
I hope you can help me with this.
NJ
No comments:
Post a Comment