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I am trying to get an education about 401K plans for small business. It is my understanding there is something referred to as a "small business 401K" where you can own a small business and you and your spouse are the only contributors to the 401K plan. We own a small business and the spouse and myself are the only employees - everyone else is a contractor (not an employee).

I sort of understand that each of us can contribute $17,500 this year PLUS $5500 catch up, if we are over 50 (which we both are). So, a total of $23,000 each, if we open the 401K by December 31st for this tax year (2013).

I am trying to further understand, that I think these 401k contributions are deductible as a business expense? Can anyone explain this? So, if I am understanding this - we could have $23,000 for each of us as a deductible business expense on our tax return?

If I am on the right track here (and bear with me, because I am real beginner with this), we would then compare 401K plans offered by various companies, and choose one, and then send in to the fund ($23,000 for each for us by December 31st). I guess my next question is what to look for in comparing them. We have some stocks in an E-trade account, and I believe they offer 401K plans (not sure about this). Is it just simple for us to open one with E-trade? I guess E-trade may offer several?

Anyway, I guess you can tell I am just beginning to research this. I would ask our CPA all this - but we are seriously thinking about finding another CPA, because we are wondering why he didn't advise us of this a few years ago. So, at this point, we are looking for another CPA. Any help at all would be greatly appreciated. Thanks.

Footsox
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It is my understanding there is something referred to as a "small business 401K" where you can own a small business and you and your spouse are the only contributors to the 401K plan.

Yep. They also go by "solo 401k" or "solo K".

There's nothing really unique about them. Any business with employees can have a 401k plan. The only difference for these is that they don't have to do most of the testing required when there are other covered employees.

We own a small business and the spouse and myself are the only employees - everyone else is a contractor (not an employee).

Be very careful here. Contractors who really should be employees can mess up a whole lot of things. Including a 401k plan or any other retirement plan. If you want to dig into this issue further, I'd suggest starting another thread.

I sort of understand that each of us can contribute $17,500 this year PLUS $5500 catch up, if we are over 50

Yep. Same rules as any other 401k plan.

I am trying to further understand, that I think these 401k contributions are deductible as a business expense?

Yep again. Mostly. They are definitely deductible from your income. But if your business is reported on a schedule C or is a partnership, the deduction is a bit different from a business reporting as a corporation. Mainly, you don't get to reduce your income for self-employment tax purposes. And you have to have at least as much income as you contribute to the 401k plan.

If you mention how your business is organized, we can give you some more specific guidance for that particular entity.

Anyway, I guess you can tell I am just beginning to research this.

Depending on your business income and your goals, you might want to look at a SEP in addition to - or instead of - a 401k plan. A SEP allows you to put up to about $50k into the plan per year. If you have both a SEP and a 401k, you can't exceed the SEP dollar limit on contributions. (Well, except that you can add in the $5500 extra to the 401k for being 50 or older.) A SEP is also limited to 20% of your income from the business (or 25% of your W-2 wages, if you pay yourself that way). So for high enough incomes, you can get the maximum deferral from just a SEP. A 401k allows you to put 100% of your income into the plan, so it's sometimes the better choice for lower incomes.

And in any case, you can also add an IRA contribution to the mix. So in theory, you could put $50k into a SEP, $5500 into a 401k, and $6000 into an IRA all in the same year. (You'd probably run into the limits for deducting the IRA contribution, but you could always make it a non-deductible contribution or possibly make it a Roth contribution.)

--Peter
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I take exception to the characterization of dumping stuff they don't want on the charity. A local homeless shelter runs a resale shop to raise money to support the shelter. They have been so successful they had to enlarge the shop. They were also able to extend the time the shelter is open by two months. Not bad!

I've donated many items which might otherwise have ended up in the landfill because I don't do garage sales. All were in servicable condition and they were happy to have them. What is surprising, according to friends who volunteer at the shop, is the people who come there to shop. Let's just say they aren't all poor.

So if you can recycle items you don't want and benefit a charity at the same time, go for it. And if you can get a tax deduction, take it. I can't anymore because I can't itemize but I used to.
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Oops! My post was meant to be response to the charitable deduction thread, although smart Fools have already figured that out. Sorry.
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I sort of understand that each of us can contribute $17,500 this year PLUS $5500 catch up, if we are over 50

Yep. Same rules as any other 401k plan.

Including the rules that allow the business to contribute up to 25% of profits as an employer contribution, up to a total contribution of $51,000. The catch up contribution is in addition to this amount. So, if the business is profitable enough, the total contribution per 50+ year old employee can be up to $56,500.

AJ
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Just to add to what others have said, I find the information at Fidelity to be really useful. Here's a chart that compares the various plans available to small businesses https://www.fidelity.com/retirement-ira/small-business/compa...

My DH is self-employed, and he has a solo 401k which has worked very well because he puts in his employee and employer contribution.
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Thanks Peter and AJ. You have given me more info in a couple of posts than my CPA does all year! Much appreciated!

Our small business is a subchapter S corporation. I know our income was over the limit for us to get Roth IRA's.... I think our after tax income for the corp was $200K (approx.) last year. That is why I am looking for other things - since we cannot get Roth IRA's....

To give you a little background - our small business has made minimal money for perhaps 15 years. So, we were always struggling to meet payroll and other payments in the business, and never had ANY retirement plan. We changed a couple of aspects of our business in the past 4 years (approx.) and so have finally made some good money. So, I am finally looking into putting money into some retirement fund -- hopefully with some kind of tax write off.. and that is why we are finally (in our late 50's) looking into this.

As for the contractors working for us, we are very careful that they fit all the parameters for "contractors." That is one thing we are well aware of and keep an eye on.

Thanks you guys for the help and advice. And anyone else who wants to post. I greatly appreciate it!

Footsox
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Thanks 2gifts for the link to Fidelity. I was just reading through it and it says no initial set-up fee and no annual fees?? I thought there were some kind of fees, for a 401K, similar to mutual fund fees. Can anyone address this? Sorry to be so confused....

Footsox
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I was just reading through it and it says no initial set-up fee and no annual fees?? I thought there were some kind of fees, for a 401K, similar to mutual fund fees. Can anyone address this? Sorry to be so confused..

I had DH's solo 401k at Fidelity for several years. If you set it up there, then there are no fees. Remember that a 401k is not a mutual fund. It is an account in which you have money that can be invested in a whole host of things just like your IRA. If you use the one at Fidelity, and I think Vanguard may also offer them, then there are no set-up or maintenance fees, and you can invest in whatever you like, but using Fidelity funds in a Fidelity account typically makes the most sense because there are no fees to invest in those funds. If you buy other stocks or other funds through their brokerage, then you will have commissions and such.

If you choose to hold your account at another brokerage house, they may have fees. In my case, we moved a bunch of investments including DH's 401k to a financial planner, and they outsource the 401k account management to someone else, so now I pay $250/year for what (little) they do to maintain the account, and so now I do have fees associated with it, but that is broker-dependent.
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Looking at the Fidelity site, it indicates that with a self-employed 401k that one can fund 17,500/23,000. However, it also states that one can also do a profit sharing contribution of up to $51,000. Doesn't that make it possible to contribute $68,500/$74,000 using just the self-employed (solo) 401k?

John
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Looking at the Fidelity site, it indicates that with a self-employed 401k that one can fund 17,500/23,000. However, it also states that one can also do a profit sharing contribution of up to $51,000.

No. You missed the part in bold below from the '2013 employer contribution limits' row:

Employers may contribute up to 25% of compensation3 up to a maximum of $51,000.
Total employer/employee contributions cannot exceed $51,000.


Any non-catch-up salary deferral made by the employee (up to the $17,500 limit) is subtracted from the amount that the employer can contribute.

AJ
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One last question - let's say I open a small business 401K (or whatever it's called) with Fidelity (or anybody else), can I then purchase stocks within that 401K acct? I am not talking about constant trading - but maybe buying a few nice stable dividend stocks and leaving them in there for the long term?

Or once I get in on a 401K, am I just at their mercy on how the money is invested? Thanks for all the advice.

Footsox
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One last question - let's say I open a small business 401K (or whatever it's called) with Fidelity (or anybody else), can I then purchase stocks within that 401K acct?

Sure, but remember fees. As we say in Kansas, there ain't no free lunch. If you house the account at a mutual fund company you can expect low fees if you buy their product; much higher fees if you stray off the range. Make sure you investigate at the beginning to make sure all the types of investments you want to make will be available to you at the provider, as well as how much it will cost.

Phil
Rule Your Retirement Home Fool
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footsox,

You wrote, One last question - let's say I open a small business 401K (or whatever it's called) with Fidelity (or anybody else), can I then purchase stocks within that 401K acct? I am not talking about constant trading - but maybe buying a few nice stable dividend stocks and leaving them in there for the long term?

Or once I get in on a 401K, am I just at their mercy on how the money is invested? Thanks for all the advice.


I've investigated, but never opened a solo-401k. Since you're considering Fidelity, I looked up their solo-401k summary page. https://www.fidelity.com/retirement-ira/small-business/self-... Looks to me like its much like their IRA accounts in terms of options and fees. In other words, you should be able to invest in just about anything and do it without any special fees. Of course I'd contact the brokerage just to make sure.

- Joel
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