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Author: storygirl Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121144  
Subject: Solo 401K / Tax Question Date: 12/27/2004 8:24 PM
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Yes, I have left it until the last minute, but I really didn't know that self-employed 401Ks existed until a couple of days ago. Here's my very basic question:

I'm self-employed and my income goes up substantially this year because I took the cash value of a employee stock plan I inherited but could not rollover into an IRA. It's around $60,000 (and 10% tax was deducted before sending me proceeds) which brings my income up to the highest tax rate. But, if I open a self-employed 401K and put a chunk of inherited money in there, will that keep me from being taxed this year on that very same money? I suspect I have to pay those taxes no matter what, but wonder if you guys know otherwise. I'd have to open up a solo 401K before the end of the year, so that clock is ticking.

Thanks very much for any advice you can offer.
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74975 of 121144
Subject: Re: Solo 401K / Tax Question Date: 12/27/2004 8:41 PM
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But, if I open a self-employed 401K and put a chunk of inherited money in there, will that keep me from being taxed this year on that very same money?

Technically, no. Any contribution to a solo 401k plan would be based only on your self-employment earnings. So when talking to administrators and other service providers, you are simply setting up a new plan.

However, perhaps you can afford a larger contribution than you otherwise might be able to make because you have received some other money during the year.

You have a reasonable plan, just make sure you are referring to what you want to do in the technically correct way.

--Peter

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74983 of 121144
Subject: Re: Solo 401K / Tax Question Date: 12/27/2004 9:28 PM
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Yes, I have left it until the last minute, but I really didn't know that self-employed 401Ks existed until a couple of days ago. Here's my very basic question:

I'm self-employed and my income goes up substantially this year because I took the cash value of a employee stock plan I inherited but could not rollover into an IRA. It's around $60,000 (and 10% tax was deducted before sending me proceeds) which brings my income up to the highest tax rate. But, if I open a self-employed 401K and put a chunk of inherited money in there, will that keep me from being taxed this year on that very same money? I suspect I have to pay those taxes no matter what, but wonder if you guys know otherwise. I'd have to open up a solo 401K before the end of the year, so that clock is ticking.

Thanks very much for any advice you can offer.


First things first. When you say you are self-employed, you need to distinguish between a sole-proprietorship or being the sole employee of your own corporation. (Technically, the latter is not self-employed but can open a self-employed 401K.) The reason for the distinction is the difference in how and when the 401K can be funded.

First the bad news. You must have all the paperwork for the 401K signed and submitted to your plan's administrator by December 31. Some plan administrators have already closed new applications for the year.

Next, if you are an employee of your own corporation, it will be difficult to make a 2004 contribution as the employee's contribution must be made via salary deferral. If you can't cut yourself another salary check, you can't contribute.

The good news. If you are a sole-proprietor, funding needs to be completed by April 15. You have time to determine your self-employment profit and the related contributions.

As you may know already, your contribution can be as much as 25% of your net profit after deducting the pension contribution (20% before contribution) plus 13K up to a max of 41K (more if you are older than 50). But, your maximum contribution is limited to your net profit.

It doesn't matter whether the source of the contribution comes from your inherited stock plan or somewhere else... however, the value of the stock doesn't enter into the calculation of allowable contribution.

If you have further questions, just ask.

Ira

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