I work as a 1099 contractor part time, and as a W2 employee full time
(40 hrs a week). My W2 employer offers a 401k plan, which I do not
participate in yet, in 2008. I also have a solo 401k set up from last
year. I expect my 1099 income to be about the same as my W2 income
I would like to defer the maximum amount possible.
My question is, will it be advantageous for me to not participate in
my employer's 401k and instead only defer my 1099 income into my solo
401k because I could theoretically defer upto $43000 whereas I can
only defer $15500 max if I participate in the employer's 401k (the
employer does not match any contribution at all).
I have heard that because I am eligible to participate in my
employer's 401k plan, I may not even be eligible to contribute to my
solo 401k. Is this true?
John Bliss writes:
All 401(k) plans, both "regular" ones that "regular" employers
offer and solo-401(k) plans for sole proprietors accept two
kinds of contributions.
One kind of contribution is "salary deferral" -- this comes
from the employee (or the sole prop wearing his employee hat)
and for 2007 is limited to $15,500 (not counting the older
worker "catch up" provision) across ALL 401(k) plans. In
other words, all your salary deferral contributions COMBINED
cannot exceed $15,500.
So if you contribute the full $15,500 to your "regular"
employer's plan, you cannot make any salary deferral
contribution to your solo-401(k).
However, the other kind of contribution is "profit sharing" coming
from the employer. For "regular" employers, this usually
comes in the form of the company match. For sole props,
this can be as high as 20% of net self-employment income
(which is your Sched C net minus half your SE tax). Each
employer can make its own profit sharing contribution to
its plan. Being in your "regular" employer's plan (and even
receiving a match from them) does not prevent your sole prop
from making a profit sharing contribution to your solo-401(k).
If your "regular" employer does not match, then it's a wash
as to where you put the $15,500 salary deferral contribution.
Though I'd go with putting it in the solo-401(k) because those
are generally fully self-directed -- you're not stuck with
a limited set of investments.
However, be aware of state tax laws. For example, for some
bizarre reason, here in Massachusetts, none of a sole prop's contribution
to his solo-401(k) (neither the salary deferral part nor the
profit sharing part) are deductible for state tax purposes. But
the salary deferral contribution of a "real" employee is
deductible. Go figure.
Rich Carreiro email@example.com
No. Your (employee) elective deferrals to all of your 401K plans
can not exceed the maximum allowed. If you make elective
contributions with your W-2 employer, there is a dollar for
dollar reduction in the amount you can contribute to your Solo
401k as an employee. This does not prevent you as your own
employer from making employer based contributions to your Solo 401K.