Figuring maximum self-employment retirement account contributions for 2020

[hullian]

It appears that you have not yet changed the maximum allowable contribution amounts for solo 401k's. It's still telling me that the max contribution is $19,000, but it was increased to $19,500 for 2020; same for those of us over 50 - the increase is not showing yet. But my question is, why does the system not seem to understand that in addition to elective deferrals, solo 401k owners also make "employer" contributions, the max of which is based on the amount of self-employment income. Where it tells me how much more I may contribute for the year, it is leaving out the amount I paid in employer contributions.

[dmertz · Accepted solution]

TurboTax does not appear to have any problems calculating the proper actual employer contribution outside of the fact that the elective deferral and catch-up limits have not yet been updated.  The ability to make an employer contribution depends on your net earnings from self-employment.  If all of your net earnings go to elective deferrals, nothing remains to fund the employer contribution.  Also, your employer contribution is limited to 20% of net earnings or one-half of the amount of net earnings that remain after subtracting your elective deferrals, whichever is less.  You can review the calculation on TurboTax's Keogh, SEP and SIMPLE Contributions Worksheet.

Net earnings are your net profit minus the deductible portion of self-employment taxes.

Since you appear to be using the CD/download version of TurboTax, in forms mode you can override and correct on the Keogh, SEP, and SIMPLE Contributions Worksheet the amounts on lines 9, 17 of Part III and line 1 of Part V.  You'll need to remove those overrides once the worksheet is corrected by TurboTax.  It would be best to do these overrides in a copy tax file separate from the one that you use to prepare the tax return that you will actually file.

[hullian]

You say "If all of your net earnings go to elective deferrals, nothing remains to fund the employer contribution."

I have made my full $19,500 elective deferral and $6,500 over-50 contribution for a total of $26,000. These are the maximum allowable amounts. But based on my self-employment income, I should STILL have, by my calculation, about $15,000 in employer contributions available. I told the system that I have made $10,000 in employer contributions to the 401k and another $5000 to a SEP. That should leave about $500 to go to maximize my contributions. But the system is telling me that I have about $5000 to still to go to maximize, and it seems to be ignoring the employer match I've already made. There is something wrong..... :(

[dmertz]

The Your Retirement Contributions page in step-by-step mode is a mess to the point that it is entirely incomprehensible and therefore useless.  I complained to TurboTax Product Quality about it for years.  They corrected a few of the problems that I identified, but never got it even close to being right.  I finally gave up.  Ignore that page and look at the Keogh, SEP and SIMPLE Contributions Worksheet instead.  In your case, your net profit is high enough that your maximum permissible total employer contribution would be 20% of net earnings and will be present on line 5 of this worksheet.  While you are looking at this worksheet you can apply overrides to correct the amounts on Part III lines 9 and 17, increasing them by $500 each, and to correct the amount on Part V line 1 to match the amount on Part III line 21.

Note that a SEP plan based on Form 5305-SEP must be the only plan you have.  You can only have both a 401(k) and a SEP plan if your SEP plan is based on some other prototype SEP plan agreement.  Since whatever you contribute to the SEP plan reduces the amount that you are eligible to contribute to the 401(k) plan dollar for dollar, it generally doesn't make sense to have both anyway.  The only benefit to having both is perhaps some greater flexibility in investment options and you can easily take distributions from the SEP plan before age 59½.