I am contributing to the 401(k) at my part time job, but want to know if I can also open a Solo 401(k) to delay taxes on income from my work as an independent contractor.
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Please clarify what source(s) of income you have. Is "part time job" in your question text the same as "independent contractor" in your title, or are those two separate jobs?– BrenBarnJun 13, 2015 at 2:23
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Separate incomes, part-time employee is w2– rjdevereuxNov 10, 2015 at 15:58
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Okay. As described in my question, you can't have a Solo 401k unless you have self-employment income. If someone else is paying you as a W-2 employee, that's not self-employment income and can't be used for a Solo 401k. But if you have other income that is self-employed, you can use that for a Solo 401k.– BrenBarnNov 10, 2015 at 18:30
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3 Answers
If you have self-employment income you can open a Solo 401k. Your question is unclear as to what your employment status is. If you are self-employed as an independent contractor, you can open a Solo 401k. You can still do this even if you also earn non-self-employment income (i.e., you are an employee and receive a W-2). However, the limits for contributions to a Solo 401k are based on your self-mployment income, not your total income, so if you have only a small amount of self-employment income, you won't be able to contribute much to the Solo 401k. You may be able to reduce your taxes somewhat, but it's not like you can earn $1000 of self-employment income, open a Solo 401k, and dump $5000 into it; the limits don't work that way.
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Thanks for clarifying the Solo K contributions would be limited to the self-employed income, that's not a problem. Jun 13, 2015 at 21:34
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Once you've opened a Solo 401(k), you can always roll over an existing Traditional 401(k) or IRA into it — the self-employment income limits for contributions do not apply to rollovers. Nov 7, 2015 at 21:52
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@ConradMeyer: Yes, but that won't help as far as reducing/deferring taxes, since the deferral will happen when you contribute to the 401k or IRA, and will be subject to corresponding limits.– BrenBarnNov 7, 2015 at 21:57
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@BrenBarn, yup. The context where this is useful (aside from an old 401(k) with bad options) is when you are above the income limits for Roth IRA contributions, but have an existing Traditional IRA account. If you roll the funds to a Solo 401(k), they are no longer subject to the pro rata rule that would otherwise make a Backdoor Roth IRA contribution costly. Nov 9, 2015 at 4:39
A Solo 401k plan requires self-employment income; you cannot put wages into it.
answered Jun 13, 2015 at 1:40
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Yes, it would come from the independent contracting income. Thanks Jun 13, 2015 at 21:28
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Well, you can't put W-2 wages into it directly as contributions, but you can rollover a Traditional IRA (funded with wages) or a Traditional 401(k) from an old W-2 employer with no limits or penalties. Nov 7, 2015 at 21:54
I'm in a similar situation as I have a consulting business in addition to my regular IT job.
I called the company who has my IRA to ask about setting up the Individual 401k and also mentioned that I contribute to my employer's 401k plan. The rep was glad I brought this up because he said the IRS has a limit on how much you can contribute to BOTH plans. For me it would be $24K max (myAge >= 50; If you are younger than 50, then the limit might be lower). He said the IRS penalties can be steep if you exceed the limit.
I don't know if this is an issue for you, but it's something you need to consider. Be sure to ask your brokerage firm before you start the process.
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Thank you for pointing this out, I understand the contribution limits apply across all income sources. It makes it a little complicated to calculate since I can not perfectly predict the self-employed income. Nov 10, 2015 at 16:01