403(b) and Solo 401k annual contributions

I have a husband and wife client. The husband is the sole owner in a business. The wife works at the local hospital and contributes a few thousand dollars a year to her 403(b). The husband has a one-time business transaction that will generate many hundreds of thousands of dollars this one year. To minimize this one time tax event and to contribute to their much needed retirement savings, we (financial advisor, accountant and client)are exploring creating a husband and wife partnership for the business. They would then create a Solo 401k plan. It is our understanding that the husband can contribute up $56,500. How would her contribution limit be calculated? Any insights or comments would be greatly appreciated.

Thanks.



In order for the wife to have a contribution, she’d have to perform services for the business. Her SE earnings would be used to determine the contribution. For each partner the contribution is based upon a deferral portion and a profit sharing portion. The 2013 deferral amount is $17,500 with an additional $5,500 allowed if the participant is over 50. If earned income is less than the deferal amount, the amount deferred is reduced. The profit sharing maximum portion is 20% of the SE income reduced by the SE tax deduction on page 1 of the return. When you add the profit sharing and deferal portions together they cannot exceed $51,000 if under 50 and $56,500 if over 50. The amount of compensation taken into account for the calculation islimited to $255,000. If the wife’s SE earnings when reduced by the SE tax deduction is greater than $255,000 – her limit is reduced by her 403(b) contributions.

  • The point is that the $56,500 for the husband has to be a calculated figure and so does the wife’s contribution. If they start a partnership, they have to have profit/loss percentages and earned income to do anything. A solo 401k is a permanent retirement plan and both spouses would have to be covered in future years as well. If there are other employees in the business, they must be covered as well. The 401k is not simple and doesn’t work for a one time planning idea.


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