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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16544
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I am self-employed and I want to open an individual 401(k).

This answer was rated:

I am self-employed and I want to open an individual 401(k). There is a limit (I think it is around $17,000) that I can put in pre-tax per year as an employee. Since I am a sole proprietor I can also put in money as the employer, which is not pre-tax but I can write off that amount as a business expense. My instinct is that I should donate as much as possible as employee contributions first, and then make whatever additional contributions I want to make as the employer. Is that true or does it make more sense to make contributions as the employer first?

Megan C :

Hello, and welcome to JustAnswer.com

Megan C :

How are you today?

Megan C :

If you are self employed, the overall impact on your taxes will be the same. Pre tax contributions are not included in your income for the year, and employer contributions are fully deductible.

Megan C :

So, it doesn't matter which you use - the end result is that you will pay less tax.

Customer:

Great! That makes sense. So the deduction works the exact same as a pre-tax contribution, in that it reduces the total amount of money that gets taxed as income?

Megan C :

That is totally correct.

Megan C :

So, it doesn't make a difference.

Customer:

Thank you. That was easy!

Megan C and other Finance Specialists are ready to help you
Thanks, Mike for your positive rating. Please come back and visit me any time you have a tax question that needs answered. It was a pleasure working with you today.