solo 401k and tax time question

Lisa99 · Jan 28, 2015

I'm stumped... googled, looked at TurboTax FAQs and still can't figure this out so I hope someone here can help.

DH started an independent consulting company this year. He has no employees. I opened him a solo 401k in Vanguard and funded it with $23k contribution and $10,5k employer match (which I thought was close to the max he'd be able to contribute based on net income).

But as you can see in the screen shot below from Turbo TurboTax shows that we can fund it with more than $40+k in total this year.

What am I missing?

Animorph · Jan 28, 2015

How much did he make? You are allowed to add 20% of compensation as the profit sharing contribution for a sole proprietor. 25% for some other cases. Compensation excludes the "employer" half of self employment taxes. Subject to the maximums. Never really called an "employer match" that I've heard, so that part is a little confusing to me. If the $10,500 was intended to be the 20% "profit sharing" component then you may have contributed a little over the $31,448 Turbo Tax said you could.

Solo 401k | Solo 401k Contributions | Solo 401k Contribution Limits | IRA Financial Group | www.irafinancialgroup.com

Lisa99 · Jan 28, 2015

Thanks Animorph for the calculator. It's amazing how none of them come up with the same answer. DH grossed $74,500 and had no unreimbursed expenses other than self employment tax. So i401k contribution amt is based on about $69k.

I finally found the rules on Vanguard's small business site where I have the 401k. They break it down simply. It's basically $23000 + 25% of net business income... I can remember that!

Animorph · Jan 29, 2015

That's a nice table. But double check that 25%. That only applied to certain types of businesses when I was using my Solo 401k. I was a sole proprietor, the easiest to set up, and the profit sharing dropped to 20% for that type of business. Other than that, you should be set. Reading through the IRS publications, they don't seem to mention the 20% rate. The link I gave above does mention it. Maybe it has changed recently.

Lisa99 · Jan 29, 2015

Thanks, I have to call Vanguard today about something else so I'll ask them about 20% vs 25%.

someguy · Jan 29, 2015

Animorph is correct. I'm guessing he'll be subject to the 20% of net income, not 25%.

Vanguard is good about reclassifying contributions if it turns out you went over. It's a bit of hassle in terms of paperwork and then getting a (taxable) check back from VG, but it's better than the potential alternative (audit).

solo 401k and tax time question

Lisa99

Thinks s/he gets paid by the post

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Animorph

Thinks s/he gets paid by the post

Lisa99

Thinks s/he gets paid by the post

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Animorph

Thinks s/he gets paid by the post

Lisa99

Thinks s/he gets paid by the post

someguy

Full time employment: Posting here.

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