Spousal Superpower: Unlocking Maximum Retirement Savings In Your PC

I Tripled My Retirement Savings

Embarking on the micro-corporation journey as a physician has its challenges, but it also opens doors to powerful tools that can supercharge your retirement savings. In my personal experience, the combination of a Solo 401(k) and a Cash Balance Plan allowed me to triple my tax-advantaged retirement contributions, propelling my the growth of my net worth and paving the way for a comfortable Fat Fire retirement in my late 50s. The larger contribution was due to the fact that I was flowing all of my earnings through my micro-corporation through a combined employment lite contract and multiple side hustles.

The exciting news? The same path is available for you!

As I engage with physicians nationwide, a common scenario emerges: doctors juggling a traditional W-2 job while earning substantial 1099 side income, ranging from $40, 000 to $100, 000. The inevitable question arises: How can you retain as much side income as possible, and could a micro-corporation be the key?

In a previous blog post, I discussed a case study on "How To Pay No Taxes On Your Side Income." —you should check that out for a primer on this subject. Spoiler alert, if you using a sole proprietor structure you are making the wrong choice.

Dr. Early Retire

Let's explore the benefits of Solo 401(k) and Cash Balance Plans through the story of Dr. Early Retire. She is a 40-year-old married internal medicine specialist earning $400, 000 in W-2 income and has successfully turned her $100,000 side income into a solid retirement plan.

Let’s assume that Dr. Early is maxing out all of her tax-advantaged retirement funding through her W-2 primary job.

The great news is that in addition to this, she was fortunate to be a member of the SimpliMD community and had come across my case study on structuring side income businesses. Consequently, she made a smart move by establishing a professional micro-corporation and strategically combined her side income with her W-2 earnings through job stacking. Having two income sources not only increases household earnings but also boosts tax-advantaged retirement funds. This is another compelling reason to seek opportunities to generate 1099 income alongside your W-2 earnings. Earning $100, 000 opens the door for a solo 401(k).

Understanding the Solo 401(k) Advantage

1. What is a Solo 401(k)? A Solo 401(k) is a retirement savings plan designed for self-employed individuals, offering unique benefits for physicians operating micro-corporations.

2. Dr. Retire's Story (Case Study): Dr. Retire explored her micro-corporation's potential. With a side income exceeding $100,000, she sought a retirement strategy aligning with her entrepreneurial goals – enter the Solo 401(k).

3. Contributions and Tax Advantages: Solo 401(k)s allow both employer and employee contributions, enabling Dr. Retire to make substantial pre-tax contributions, reducing her taxable income and growing her retirement savings tax-deferred.

4. Employing Your Spouse: Dr Retire was wisely counseled that if her micro-corporation employs her spouse (secretary, book-keeper, etc) they can BOTH they can each contribute up to the micro-corporation’s solo 401(k) plan up the IRS limit for 2024, each spouse can contribute up to $19,500, totaling $39,000 annually for both spouses. The tax efficiency of this arrangement is spectacular as it allows the corporation to deduct the spouse’s salary as a business expense, reducing taxable income. The spouse’s salary can be used to fund retirement accounts, further maximizing tax-advantaged savings. This little small business secret is exactly what I do with my spouse who has been a stay at home mom our entire married life.

Now lets add an even more powerful layer to their solo 401(K) retirement fund—the cash balance plan.

Harnessing the Power of Cash Balance Plans

1. What is a Cash Balance Plan? It's a defined benefit plan working in tandem with a Solo 401(k), particularly advantageous for those with variable incomes, offering a fixed benefit at retirement.

2. Dr. Retire's Story (Case Study): Dr. Early strategically integrated a Cash Balance Plan into her retirement portfolio, complementing her Solo 401(k) and providing a reliable stream of income in retirement. Using an actuary, she was able to determine the maximum tax advantaged contribution possible through the combined 401(K)-cash balance plan. The contribution amount depends on factors like age, income, and desired retirement benefit.

3. Predictable Retirement Income: Cash Balance Plans offer predictability, valuable for physicians with fluctuating incomes, ensuring a fixed benefit based on salary and years of service, providing peace of mind in retirement.

The Spouse and Micro-Corporation Tipping Point

In our case study, Dr. Retire Early earns $100,000 of 1099 income and pays her spouse $20,000 per year to be a book-keeper for the business. Now let’s down to brass tacks and compare and contrast the amount that both the husband and wife can both contribute to their solo 401k-cash balance plan if the 1099 income was received as a sole proprietor versus as a professional corporation taxed as an S-corp.

Again I come across this question nearly every week—so it’s important to address. And sadly most doctors simply default to receiving it as sole proprietor—due to it’s low cost & ease—and likely due to their tax preparers simplified advise. But you, doctor, need tax planning—not just tax preparing! Check out our SimpliMD accounting network for great physician friendly options for tax planning if you are simply getting your taxes filed each year with little ongoing counsel and planning!

Sole Proprietor Vs Micro-Corporation for Retirement Funding

Now let's compare and contrast the contribution limits for a Solo 401(k) with a Cash Balance Plan for both the husband and wife, considering the 1099 income received as a sole proprietor versus as a professional corporation taxed as an S-corp.

1. Sole Proprietorship Scenario:

Dr. Early Retire (Sole Proprietor):

• 1099 Income: $100,000

• Employee Contribution (Solo 401(k):

  • For 2024, the maximum employee deferral limit is $19,500 for those under 50 and $26,000 for those 50 and older.

• Employer Contribution (Profit Sharing):

  • As a sole proprietor, the employer contribution is based on business income, subject to specific calculations.

  • The total contribution limit for the Solo 401(k) is $58,000 for those under 50 and $64,500 for those 50 and older.

Spouse (Book-keeper):

• No direct contributions to the Solo 401(k) since the spouse is not generating 1099 income.

2. Professional Corporation Taxed as an S-Corp Scenario:

Dr. Early Retire (S-Corp Owner):

• 1099 Income through S-Corp: $100,000

• Employee Contribution (Solo 401(k):

  • Same as in the sole proprietorship scenario.

• Employer Contribution (Profit Sharing):

  • As an S-Corp owner, the employer contribution is based on W-2 income.

  • The total contribution limit for the Solo 401(k) is $58,000 for those under 50 and $64,500 for those 50 and older.

Spouse (Book-keeper):

• Can receive a W-2 salary from the S-Corp.

• Employee Contribution (Spousal Solo 401(k):

  • Same limits as the husband's Solo 401(k).

• Employer Contribution (Profit Sharing):

  • The doctor, as the employer, can contribute up to 25% of the wife's W-2 income to the Spousal Solo 401(k).

  • The total contribution limit for the Spousal Solo 401(k) is $58,000 for those under 50 and $64,500 for those 50 and older.

3. Comparisons:

• In the sole proprietorship scenario, the spouse doesn't have direct contributions to the Solo 401(k).

• In the S-Corp scenario, the spouse can receive a W-2 salary, making them eligible for contributions to the Spousal Solo 401(k).

• The S-Corp scenario allows for more flexibility in maximizing retirement contributions for both the husband and wife.

4. Considerations:

• Consult with a tax professional or financial advisor to ensure compliance with regulations and to tailor the strategies to the specific situation.

In summary, when the 1099 income is received through a professional corporation taxed as an S-corp, there is greater potential for both the husband and wife to contribute to retirement plans, including the Solo 401(k) with a Cash Balance component and the Spousal Solo 401(k) for the spouse. This structure provides more flexibility and potentially higher contribution limits compared to the sole proprietorship scenario.

The Micro-Corporation Advantage

1. Seamless Integration: Micro-corporations' flexibility shines as Dr. Early seamlessly integrated her Solo 401(k) and Cash Balance Plan, optimizing her retirement strategy. The more 1099 income she earns, the more she will be able to place in the plan with the maximum for 2024 being $345,000

2. Tax Efficiency: Micro-corporations, paired with these retirement plans, offer a tax-efficient avenue. Dr. Early's structure maximized contributions while minimizing tax liabilities and this was accelerated by employing her spouse in the micro-corporation.

Conclusion

Physicians are increasingly adopting the micro-corporation model, with Solo 401(k) and Cash Balance Plans emerging as powerful tools for maximizing retirement savings. Dr. Early Retire's story highlights the potential of a well-planned retirement strategy in transforming a side income into a secure financial future, boosting your net worth and enabling earlier retirement.

Are you earning 1099 income as a sole proprietor and missing out on the benefits of using a professional micro-corporation for your Solo 401(k) and Cash Balance Plans for both you and your spouse? Connect with me at SimpliMD to explore personalized solutions and unlock the full potential of your micro-business on your journey toward financial empowerment and retirement readiness.

You can also follow Dr Early Retire’s lead and become a SimpliMD member today. And because you all the way to the end of the blog, your prize is a 50% off coupon for membership, use “MEMBERSHIP50” at checkout.