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I have a leftover 401K from my previous employer (in fact I have two of them from two different employers).

Currently, I am drawing some income as a sole proprietor of a management consulting company. Can a client play directly into my 401K (or an IRA) to avoid taxation of that income? Or, alternatively, do I need to take the client fee as income and then deduct it somehow?

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Or, alternatively, do I need to take the client fee as income and then deduct it somehow?

Yes, but note that you can't contribute to a 401(k) after you are no longer employed by the company - you will need to roll that money into an IRA.

After that, then you would count the income as income, then deduct the IRA contributions (subject to annual contributions maximums). Only you can contribute to your IRA (others can make gifts, but there are still restrictions, and income cannot be classified as a"gift" for this purpose.

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No one can contribute to a 401(k) that was established by a previous employer-- not you and not one of your clients. (Well, depending on how you might define "contribute", if you have a rare 401(k) that lets you take out a loan and pay it back after separation, I suppose you might argue that the interest you're paying counts..)

As a sole proprietor, your sole proprietorship can establish a retirement plan that you as the company and/or you as the employee can contribute to and (potentially) deduct. The easiest plans to establish are generally SEP and SIMPLE IRAs but a Solo 401(k) may let you shelter more of the income (it'll probably have higher fees though). A quick rundown of the various retirement plans your company can establish will walk through the various contribution limits that you'd need to be aware of to figure out what type of plan you want.

Of course, you can also contribute to a traditional or Roth IRA personally (depending on your income limits) but that generally has lower contribution limits than a company plan. If you want to limit the number of plans that you contribute to (and get access to investment options other than what your old plans allow), you can roll over your prior employer 401(k)'s to a traditional IRA that you manage and then make additional contributions to that account from the income you receive from the sole proprietorship.

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No, your clients cannot contribute directly to your retirement accounts.

The taxes are figured out every year when you file your income tax return. There's no advantage to having a client pay into a retirement account, even if it were possible.

So, yes, you take the client fees as income, then contribute to your retirement accounts as you see fit and as allowed by law. The tax deductions are calculated on your tax return.

How much of your pay you withhold for FICA or for estimated income tax payments is a consideration and can be affected by your retirement contributions. Any excess withholding or estimated taxes paid would be refunded at tax time.

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