All Forum Posts by: Zach P.

@Zach P.

I agree with  @Michael Plaks ( of course) that you should consult a professional, or two.  Trader income (which I assume to mean stocks and bonds or the like) isn't earned/active income that you can put into the solo 401k.  How you get that to be a "trade or business" is definitely something you need to figure out, but not here on a public forum.

Also, honestly I thought the $57k was aggregate.  For example, if you had two jobs that gave you a 401k benefit, between the both you couldn't exceed the $19k employee contribution.  That's just the employee side.

It is interesting since assuming if you could pay yourself a salary, you wouldn't be paying additional FICA since you'd be maxed out by your day job (as long as you don't get fired or leave you wouldn't have to worry about the estimated tax for the FICA, in my opinion, since you know you will be covered).  At least short term capital gains are taxed at your marginal rate so you aren't "losing" anything there.  So maybe just pay yourself a salary from your short term gains portion...  So, maybe you could put a chunk away into a tax advantaged account.

Again, interesting to think about, but you need some dedicated assistance.  Good luck.

@Zach P.

There is a more than a little bit of incorrect information in this thread...  Let's un-muddy the waters...

First, income from trading, like investment income, is not earned income for retirement account purposes.  This is true even if you (or a controlled entity) make a Sec 475(f) election.  For this reason, many self-employed, tax status traders do their trading through a wholly-owned corporate tax entity, either S or C (usually S), to open up retirement and health insurance planning opportunities.

Second, you should talk to your tax professional about a Sec 475(f) election, and the interplay with the QBI deduction thereunder, taking into consideration Specified Service Business Treatment and phase-out limitations.  A planning engagement with a projection might be in order.

Third, there are a few different limitations on qualified retirement plan contributions.  First, elective deferrals are aggregated across all 401(k) plans (the Sec 402(g) limit).  So, if you contribute $6,645 for the 2020 tax year to a non-equity W-2, you would be able to concurrently contribute up to $12,855 through a Solo 401(k).  Second, the "overall" limit does NOT aggregate across all 401(k) plans unless we have common control (the Sec 402(c) limit).  Your non-equity employer's 401(k) plan and a Solo 401(k) would NOT be aggregated under Sec 402(c).  Therefore, you could contribute up to $57k at the non-equity W-2 (allowable employee deferral plus employer match) AND up to $57k in your Solo 401(k) (allowable employee deferral plus employer contribution).  Of course, contributions will be limited by earned income.

Your tax situation is complex enough to warrant onboarding a tax professional as a permanent external partner on your team.

I don't think you mentioned that it was trader income until after I responded. You called it business, so my assumption was that it was business, like consulting or selling stuff. Normally, trader income is not earned income. You cannot pay salary off of it or create retirement plans. 

Sometimes, however, if your trading activity is substantial enough, it can rise to the level of "trade or business" which has both positives and negatives. This is complex and not something to settle in an online post. $150k income warrants paying a good accountant to analyze its tax attributes.

Hey Zach,

I'm not your tax guy so hire one. And, I don't practice, but I know a little bit about taxes. Good that you accounted for the employee max deferral across plans i.e. $19,500.

You will likely have to pay both the Social Security portion and the Medicare portion on your self-employment salary. It's true that SS caps out once your income reaches a certain threshold, but you'll withhold as though you're starting from zero with a new job, i.e. your side biz. Any overage in SS tax will be credited to you later on. Also worth noting that if you check the box to be taxed as an s-corp, you have to pay yourself a reasonable salary and there are fuzzy guidelines on what that means. Is $150k reasonable for what you'll be doing? Could you pay yourself less and take the remainder as K-1 distributions? That would save you a bit of Medicare tax. Good luck and talk to someone qualified before forming your LLC and retirement plan.