Impact of Solo 401k Distributions on Social Security Benefits & Contribution to Full-Time Employer 401k and a Solo 401k Plan

QUESTIONS:

I currently have a solo 401k with you all. I am looking at possibly helping my dad open one for his business, but I want to make sure I understand everything correctly. He just turned 65 and is receiving social security, works a job (w2) and has a 401k, and also owns a business. My questions:

1. Can he still open a solo 401k even though he is on social security and has a 401k with his job
2. Can he deposit funds into his solo 401k and withdraw them and not be dinged by social security? Because right now he is being dinged a % of his business income due to being over social security earnings threshold.

ANSWER: Participating in Full-Time Employer 401k Plan & Self-Directed Solo 401k

The IRS rules allow for contributions to multiple retirement plans (e.g., both a full-time employer 401k plan and a self-employed self-directed solo 401k).
Here are some of the key items to keep in-mind when contributing to multiple qualified plans:
Aggregated: The amount of employee (salary deferral) contributions is generally aggregated between all the qualified plans that you participate in. For example, for year 2020, the maximum employee contribution is $19,500 or $26,000  if you are age 50 or older.
Example: In 2020, Jason participates in multiple 41k plans (his day-time employer’s 4o1k plan and his side business self-employed solo 401k).  Jason is age 50 or older, so he qualifies for the $6,500 catch up contribution amount. He has already made $15,000 of employee/salary deferral contributions to his day-time employer’s 401k plan; therefore, the maximum of employee contributions that Jason can make to his solo 401k plan (provided he has the net self-employment income to support the contribution) is $11,000 ($26,000 – $15,000).
Exception: The aggregation rule that applies to employee contribution does not apply to voluntary after-tax solo 401k contributions. CLICK HERE to learn more about this exception.
Employer Profit Sharing Contributions Not Aggregated While the aggregation of contributions discussed above apply to employee contributions, they do not apply to profit sharing/employer contributions. Thus, using the same example above, if Jason makes the full employee contribution of $$26,000 to his day-time job and his employer makes profit sharing contributions of  $37,000 resulting in a total contribution of $63,000 to Jason’s full-time employer plan, he can still make profit sharing contributions to his self-employed solo 401k as well as long as he has the net self-employment income to justify it.
Earned Income from Self-Employment:  To make contributions to a solo 401k plan, you must have net self-employment income and you cannot contribute more than you make. You cannot use income generated from your non self-employed business (e.g., your day-time job) to make contributions to your solo 401k plan.

ANSWER: Impact of Self-Directed Solo 401k Contributions  & Distributions on Social Security Benefits

Yes a self-directed solo 401k can impact socialsecurity benefits, both when making contributions and when making distributions.
Impact on Social Security Benefits When Making Solo 401k Contributions
In order to make contributions to a solo 401k plan, you must have earned income from self-employment activity.  Therefore, if you are receiving social security benefits and make contributions to your self-directed solo 401k plan, you could loose social security benefits if you are younger than the full retirement age of 66.
Impact on Social Security Benefits When Making Solo 401k Distributions
While distributions from a solo 401k plan wont be counted toward the forfeiture of social security benefits, distributions from solo 4o1k plans are considered earned income so they will be included toward your income threshold for determining if income taxes are due on your social security benefits.
Distributions from solo 4o1k plans (pretax funds) that are included in your taxable income are counted toward whether you hit the income threshold for Social Security taxation.  If you take a large solo 4o1k distribution of pretax funds it can result in paying higher taxes on your social security. To determine the amount of your social security benefits that will be subject to income tax determine how much provisional income you have which is where distributions from both traditional IRAs and pretax solo 401k funds is included.  See IRS Publication 915.
Distributions from Roth solo 4o1k funds, however, will not impact the taxation of your social security benefits because the distribution of Roth solo 4o1k funds (just like Roth IRAs) are tax free if taken after you have had the Roth solo 401k for both 5 years are over age 59 1/2 at time of the distribution.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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