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Author: flityness Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: individual / solo 401(k) concerns (profit share) Date: 10/18/2007 1:02 AM
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some background:
- have 10% ownership of a llc taxed as an llc
- 2 other partners (1 active, 1 not)
- no other employees (at present)
- receive compensation solely as distributions (not salary)
- distribution is received bimonthly like a salary
- distributions didn't start till mid year (even though i worked all year) so total compensation for this year will probably be <$50k

question 1:
-----------
Am I eligible to contribute to a solo 401(k)?

- As far as I can tell, I can contribute to a solo 401(k) but NOT a solo Roth 401(k) since only salary and not distributions can go into a solo Roth 401(k)

- There is still a question in my mind because places say you're eligible ONLY if you have NO employees except a spouse. Presumably owners don't count as employees but I'm not sure

- one source says you can have "one or more business partners and no other employees." (which is the case)

question 2:
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How much can i contribute?

To a Solo 401(k) you can contribute:
25% of compensation if incorporated OR
20% of compensation if sole proprietor PLUS
$15,000 of salary deferral
capped at $44k total

Since I have no salary and am not incorporated, I assume I'm limited to 20% of compensation (even though not a sole proprietor)

and it's not actually 20% of the distributions, it's 20% of net income from self-employment, which is Business Income reduced by one-half of self-employment tax paid

question 3:
-----------
How much can I contribute THIS year? (Since I haven't established the plan yet, are there any prorating or timing issues)

I found this:
"For Solo 401k plans only (defined as 401k plans with no non-owner employees and consisting of just a business owner and/or their spouse), you may contribute both the employee contribution (including ROTH contributions) and the employer contribution (profit sharing) up until the filing of your tax return."

Is this correct? So I can wait to contribute the full ~20% of 2007 compensation until april or whatever of 2008?

question 4:
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Any requirements on the other partners?

Do they have to be a member of the same plan?
Do they have to make the same contributions?

one source said there must be same employer contribution for all profit sharing partners

this would completely unfeasible

another source said "It will not be subject to top heavy testing, and the anti-discrimination rules as long as your partners are 5% or greater owners" (which is the case)

which to me sounds like the employer contribution can be arbitrarily set per partner (which is needed)

question 5:
-----------
What happens if employees are hired later?

I think I recall something about the IRS frowning on chopping off benefits when someone is hired, but my memory is somewhat fuzzy on this.



If you only have time for one question, I am most concerned about #4 at the moment.
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