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Lane, I have a question about solo 401K. I own an LLC (with…

Hi Lane,I have a question...
Hi Lane,I have a question about solo 401K. I own an LLC (with S-corp election) and I have a solo 401k account to which I contribute 54k (2017) yearly. My wife is a partner and owns 49% of the LLC. She is unemployed. Few months back, I opened an account for her under my solo 401k plan and I contributed 54k to her account. I added to her payroll as an employee in order to do that. I run my payroll through intuit and do everything else myself. I calculate her paycheck in a way she could contribute 100% and end up with 0$ net after contributions. My question for you is:
1. was there a way to do this without her being an employee and us incurring payroll taxes ? if she gets a distribution and no salary, is she allowed to contribute to her own solo 401k account ?
Even though I added her in October and have issued 3 0$ paychecks, I havent sent 941 form yet. So if the answer is yes the question above, my plan is to reverse things and remove her from payroll and go back to single employee modethank you
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Answered in 14 minutes by:
1/18/2018
Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 14,899
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified

Hi - Thanks for asking for me.

...

SO sorry, no. The benefit of having a spouse on the plan is that the one-employee rule of a solo 401(k) doesn’t apply to the spouse of the business owner.

...

The spouse allowed to make contributions equal to those of the business owner... but the compensation base to determine the allowable contributions is HER wage.

...

This means a married couple with a solo 401(k) can sock away twice the 53,000 maximum .... BUT there needs to BE compensation for ANY plan to be able to defer that compensation into the plan.

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All of this with NO non-discrimination testing, etc. becasue there are no rank and file employees. It treats two people as one, for this purposes. But there has to be income there, compensation, for any plan ... The reason I think this confuses many is the rule for traditional deductible IRA's is different - If the spouse doesn't work, the contribution amount IS doubled (one IRA for worked one for spouse (if all of the other rules are met for deductibility - no workplace plan coverage, or below the income limits if so, etc)

...

Not the case for actual workplace plans.

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Customer reply replied 7 months ago
if I understood correctly, the structure I have right now is correct and the only way we could contribute 108k to our solo 401k. The inconvenience in this scenario would be the payroll taxes on my wife's wages of 18k per year. She is contributing the whole amount as mentioned as employee contribution to her 401k and the LLC is contributing the remaining 36k as employer contribution ( same for me).
Do we have to file form 5500 EZ ?our combined solo 401K as of end of december just went up to 255k (we rolled over previous 401ks).
thank you

"So if I understood correctly, the structure I have right now is correct and the only way we could contribute 108k to our solo 401k."

...

That's right, sounds like you'r really maximizing it.

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"The inconvenience in this scenario would be the payroll taxes on my wife's wages of 18k per year. She is contributing the whole amount as mentioned as employee contribution to her 401k and the LLC is contributing the remaining 36k as employer contribution ( same for me). "

...

Right again, although I would point out she might be maximizing her social security that way, especially if she doesn't have the full 35 working years in yet ... she'd be replacing zeros in the average there.

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"Do we have to file form 5500 EZ ?our combined solo 401K as of end of december just went up to 255k (we rolled over previous 401ks).
thank you"

...

Congratulations :0) you're in the big plan category !

...

Yes, a plan meets the requirement for filing Form 5500-EZ if the plan's total assets (either alone or in combination with one or more one-participant plans maintained by the employer) exceed $250,000 at the end of the 2017 plan year.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 14,899
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Customer reply replied 7 months ago
thank you for your help
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