I just recently learned of the Solo 401K, which is a blessing for me as I have just recently left my W-2 position and am working as an independent contractor. I have a solo member LLC which is the entity under which I have my private practice as well as what I am doing my contracting work under. Given the fact that it is just me, and it is a single member, I presume I am eligible for the Solo 401k plan ... At this time, I have no W-2 position (I did until March) and all income is coming through the single member LLC ...

I have learned (if I am correct) that there is the 16,500 cap on deferrals to the solo 401k but in addition one can put away up to 20% of the NET profits you make up to a total of $49,000 (25% of your salary if you have a corporation and are giving yourself a salary, I think) ... Therefore you could technically defer 64,500 provided you actually net $245k (the upper limit which that $49,000 comes from)!!! Is this accurate? Is that all within the same solo 401k or is the 401k just the 16,500 with the 20% of net being a SEP or some other IRA?

In addition, I have also been looking at real estate investments and have just heard about the 1031 exchange ... but today I learned that a 401k can be 'self-directed' and you can invest in real estate and continue to do this tax-deferred as the funds are gains on a 401k plan (which are tax deferred typically) ... Am I misunderstanding it?

Lastly, my wife has been helping more and more with day to day assistance re: office ... I have opened a SECOND single member LLC where I am the owner but am NOT clinically involved (I am contracting therapists for a private practice group) ... This LLC will now be a second income source - I can't sock away another 16,500 in my name via another solo 401k just because it's a second LLC, can I???

My wife has been learning logistics and helps with administrative and marketing bits and pieces - she is definitely earning her keep and I wanted to make her a 1099 (not suer what to call her 'job description' yet) but it would then imply that she can also sock away 16,500 with her own solo 401k and also 20% of her net earnings from being a 1099 for me?!

I'm just trying to wrap my head around all this stuff that I learned within, literally, the last 5 days!

Zip Code: 08831

Wow, that's a long question.

I agree that the Solo 401k is a great way for self-employed people to save for retirement. For 2011, the maximum you can contribute to your Solo 401k is $49k. If you're 50 or older, the max is $54.5k.

You can get up to that total by contributing up to $16.5k of "salary deferrals". The remaining $32.5k will come as the "profit sharing" contribution of up to 20% of your net self-employment income.

If your wife is working for your practice, you can put her on payroll. She can then contribute up to $16.5k in salary deferrals, and then the practice will contribute an additional 25% of her gross wages into the plan as a profit sharing contribution. So if she makes $25k from you during the year, you and she together can contribute up to $21.5k into her retirement account.

You can maintain a Solo 401k if the only participants in the plan are you and your spouse. Once you have other employees who work more than 1000 hours per year, you no longer qualify for the Solo 401k, and need to switch to one that allows for employees to participate.

And setting up a second LLC does not allow you to sock away an additional $49k. When businesses have common ownership - 50% or more of two businesses owned by the same person or group of people - they are considered one business for retirement benefit purposes. Othewise, people who make a lot of money would set up dozens of separate businesses, and put away hundreds of thousands of dollars pre-tax into retirement accounts. Plus, the government doesn't want business owners to set up two businesses - one for their employees and one for themselves, and put in generous benefits for the company that they set up for themselves and give crappy benefits to the staff.

Let us know if you have any follow up questions.

Zip Code: 01801

Thank you for that info! I appreciate the attention to detail and my own 'research' was drawing me to the same conclusions so I'm glad I had a clue :)

I have to set up with a local acct soon to get things moving properly ... Was wondering about putting my wife on payroll .... Wasn't sure if it's better for her to be 1099 or W-2 ...

My second business has all 'working staff' in contractor positions (they do pass the sniff test) ...

This depends on what your wife will be doing for your practice. Most likely, you'll need to put her on payroll. Pay her $18k, and she can max out her 401k salary deferrals of $16.5k.

Also, you can have a Solo 401k even if your wife is on payroll of the practice. To maintain a 401k, the only people who work more than 1,000 per year for the practice can be the business owner and his or her spouse.

Zip Code: 01801