Tax Reduction Podcast

Episode 24. Solo 401(k) Tax Strategy for S-Corporation Owners

• Boris Musheyev • Episode 24

Share episode

Interested in Tax Strategy for your Business? Send us a message with your email address and we’ll help you get started!

In this podcast, we're diving into the Solo 401(k) — what it is, who it’s for, and why you should care. Whether you own a sole proprietorship, run an LLC, or have an S-Corp, you'll learn how to make a Solo 401(k) work for you.

Plus, discover how to grow your money tax-free! If you’re self-employed or running your own business, this podcast is packed with tips to help you save big and keep more of your hard-earned cash.


I've put together this FREE resource for you:

7 Write-Offs Every S-Corporation Business Owner MUST Know
🆓 Download FREE PDF here: https://7taxwriteoffs.com/

Ready to start saving money on your taxes?
☎️ Schedule your FREE Tax Advisory Session: https://taxplanningcall.com/

🤩 If you are looking for easy-to-use payroll software, I personally use and recommend to my clients Gusto Payroll Software - https://gusto.com/r/boris466

P.S. When you sign up for Gusto, you get a $100 Visa gift card

*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, ...

Speaker 1:

If you want to stash away $69,000 of your business profits as a tax write-off, you should consider a tax strategy of a solo 401k. We're first of all going to define what is a solo 401k and who is it good for. Then we're going to talk about how to use a solo 401k, whether you have a sole proprietorship, an LLC or even an S-corporation. Right after that, and stay till the end, because we are going to talk about how to use your solo 401k to grow your money there completely tax-free. Ready, let's dive in.

Speaker 2:

Welcome to the Tax Reduction Podcast for money-making entrepreneurs with Boris Mushaev. Boris has helped entrepreneurs across the United States collectively save millions of dollars in taxes with the power of tax planning and advisory. The only way you, the business owner, can save money on taxes is by using proactive tax strategies, and this podcast is all about saving you money on taxes. Boris will share with you in-depth and easy-to-understand tax reduction strategies that you can implement in your business within 30 days or less. Let's jump into today's episode.

Speaker 1:

Perfect. Let's get started Now. First of all, before we use the Solo 401k as a tax strategy, we really need to understand what is it for, how does it work and who is it really good for? Now, solo 401k the name kind of speaks for itself. Right, it's for the solo owner, one owner. Now you could have multiple owners partners, for example or your spouse could also be a partner in your business or own it together with you. Solo 401k will work in all of these situations. When Solo 401k does not work is when you have employees. As soon as you get employees, it automatically gets disqualified. So you want to make sure, if you are an owner, or you have partners, or you've got spouse in your business, you might want to start considering using a solo 401k, because solo 401k can really give you a $69,000 tax write-off in the first year.

Speaker 1:

Now let's talk about setting up a solo 401k. Really, there's two types of retirement accounts that we have. One of them is called a traditional. Think about it this way Whatever money you're putting away, you're getting a tax write-off, which is exactly what the solo 401k is. You get a tax write-off, but at the time of retirement, whatever your retirement account is going to earn, you're going to pay taxes not only on the contribution but also on all the distribution. You can also set up your solo 401k as a Roth 401k, and this is what we're going to talk about in the Roth 401k. Any money that you put into the Roth 401k all of that money is not tax deductible or some of it could be tax deductible, depending how you structure it with your tax advisor, and at the time of retirement it will be tax-free to you. So we've got two options traditional solo 401k and a Roth solo 401k. Both have different functions and that's exactly what we're gonna talk about. But right now we're gonna cover a tax strategy how solo 401k works as a tax write-off. Whether you're an LLC, s-corporation or a partnership business, solo 401k can be used for all of these three entities.

Speaker 1:

Let's start with a sole proprietorship. Now, what is a sole proprietorship? It is not a corporation, it is not an entity. It is reported on your personal taxes. When you're a sole proprietor, you don't take out any salary from it because everything gets reported on your personal taxes on a Schedule C of your 1040 form. Now the IRS says hey, if you're a single owner of that business, which sole proprietorships are usually single owner businesses. So the IRS says if you are a single owner of that business, what we will allow you to do is put away $23,000 into your solo 401k. Is put away $23,000 into your solo 401k. On top of that, you have to take a net profit of your sole proprietorship. Okay, take net profit of your sole proprietorship and put away 25%. That is a business contribution.

Speaker 1:

So let's do a quick example. You have a net profit meaning to say, after deducting all of the expenses, $100,000. Now you, as an owner of that business, can put away $23,000 plus 25% of $100,000, which brings up your total contribution to $48,000. Now you might say well, boris, you said that I can put away $69,000 into solo 401k. That's true. What's limiting you to put away the $69,000? Is that net profit of $69,000 into solo 401k. That's true. What's limiting you to put away the $69,000 is that net profit of $100,000. Now, in order for you to maximize that solo 401k, the net profit in your sole proprietorship should be $184,000. But when you have a net profit of $184,000 in your sole proprietorship, you should not be a sole proprietor, nor should you be an LLC single owner member. What you need to be an S-corporation and that is why it's important for you to always speak to your tax advisor. When is the best time for you to be an S-corporation? How much salary should you pay so that you can properly calculate your solo 401k contribution to get a maximum deduction?

Speaker 1:

Now let's talk about a tax strategy where you are an S corporation, you're taking a reasonable compensation and how your solo 401k contributions would work. So same example okay, you've got $100,000 in your S corporation. $100,000 in your S corporation, let's say that is your net profit. Additionally, you took out $100,000 W-2. Now, with an S corporation, the net profit no longer matters. What matters is your W-2. So the IRS says you can put away $23,000 from the W-2 that you take from your S corporation, which is your reasonable compensation. So $23,000 is a deferral which you put away into the solo 401k. On top of that, you can take 25% of your W-2 salary. So in our example, we've got $100,000 salary. So again, that brings your contribution to $48,000.

Speaker 1:

But because you are an S-corporation owner, you can actually take a look at your compensation and make a decision with your tax advisor. Should you increase your compensation to $184,000 to get a maximum write-off into your solo 401k, which will bring you up to $69,000. Now, if you're over the age of 50, your contribution goes up to $76,500. It's a big difference. So strategizing with your tax advisor is super, super important Because, as an S-corporation owner, first of all you've got to pay yourself a reasonable compensation.

Speaker 1:

Maybe in your case the reasonable compensation is $100,000. But your tax advisor could come up with strategic ways to say, hey, we can actually increase your reasonable compensation if it makes sense on the tax-wise. Okay, so that we can maximize your solo 401k contribution. Because, remember, as an S-corporation owner, you can maximize your solo 401k contribution to $69,000. You're going to be putting away $23,000 from your paycheck, right? Whatever paycheck you get from an S-corporation, $23,000 goes into solo 401k. On top of that, 25% of your W-2 will go into your solo 401k. Now that we have identified this tax strategy, let's go and talk about how you can create your put together, excuse me, establish a solo 401k, which is a Roth solo 401k, and all the money that you can contribute can be tax-free. We'll be back right after this break.

Speaker 2:

If you have a tax preparer and you do not have a tax advisor, the only way you can save money on taxes is by using proactive tax planning strategies that only a tax advisor can give you. Bora's put together a free PDF for you, the business owner Seven tax write-offs every S-corporation business owner must know. In this PDF you can find seven tax strategies that you can start using in your business to instantly start saving money on taxes. Click on the link in the description below for a free download.

Speaker 1:

Awesome. Now let's talk about how your Solo 401k can grow tax-free. Remember what we said about Solo 401k it is for owners only. Like one owner, two owners or you've got a spouse in your business, that's not a problem. So you can actually control how you can and where you can contribute their money. Now Solo 401k can also be set up where you do not get a $69,000 write-off, like we've talked about earlier, but all the money that you put away will be after taxes and that means all the money in that solo 401k is going to grow tax-free. So in our previous example we talked about let's just take an S corporation owner $100,000 W-2 salary. We'll take a 25% of that. That's a $25,000 contribution plus, assuming if you're under the age of 50, another $23,000, which is deferred from your W-2,. That is a total of $48,000 contribution. That $48,000 will not be a tax write-off, but when you invest it in wherever it is that you're gonna invest it, your solo 401k everything over there is gonna grow tax-free. Now you can also have an option where the $23,000 of your salary which is deferral okay, which is deferral can be a Roth IRA contribution after taxes, which means it's going to grow tax-free, but the 25% of your W-2 salary. That could be a write-off. You could really get the best of both worlds and you can balance it out for yourself.

Speaker 1:

The other amazing thing about this setting up a solo 401k is that you can also set up a self-directed solo 401k. What self-directed means is that you don't necessarily need to give it to a financial institution. What you can do is invest the money yourself wherever you want it. That could be securities, stocks, bitcoin, real estate. As a matter of fact, solo 401k are best for self-directed real estate investments. Of course, seek professional advice, self-directed real estate investments. Of course, seek a professional advice. Hire a company that actually handles this and where you can open up a solo 401k and contribute it with them. I personally have a client who has done it on his own, without the help of a professional, just Googled it before working with us and he was over-contributing, didn't know how much money is being taken out of his bank account. Definitely do not do that. It's a great strategy to use. It is actually not complicated at all. First of all, what you need is a tax strategist, a tax advisor, somebody that can tell you hey, this is how you can set it up and this is how it could work. Then you hire a professional that can handle your self-directed solo 401k money, put together the proper paperwork for you so that you can legally and be in compliance when you invest in real estate, stocks or cryptocurrency.

Speaker 1:

Solo 401k is a great tax strategy. It can give you a write-off up to $69,000, or you can choose not to take the entire $69,000 write-off. Instead, invest in a Roth solo 401k where your money is going to grow tax-free. Even better, you can do a self-directed solo 401k. All of these options are available to you, the business owner. What you need is a tax strategist. Make sure you speak to a tax advisor. Do not speak to your tax preparer, because your tax preparer is just putting the right numbers in the right boxes. They speak to you once a year. This is something that you need to do with a tax advisor. Thank you, until the next time.

Speaker 2:

That's it for today's episode. Be sure to check out the description below for some free tax reduction resources that Boris put together for you. If you're ready to work with a tax advisor on your tax planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. That's wwwtaxplanningcallcom. And be sure to subscribe to our podcast to be notified when the next strategy is released.