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asquith62
Level 2

Individual 401k and company 401k

I an independent contractor working for a bank.

Will make 160k to May and plan to contribute 63.5k to my individual 401k plan (57 plus 6.5k for over 50)

If i then get permanent employment  for rest of year and give up my contractor job. It seems I can them contribute 25.5k (19.5 +6) to the new company 401k and get their match.

Will assume I can still deduct my health care costs for the first 5 months as an independent contractor as well.

Thank you for any insights


 

 

3 Replies
dmertz
Level 15

Individual 401k and company 401k

For 2020, the employee contributions to the two plans combined are not permitted to exceed $19,500 of regular elective deferrals or Roth contributions and $6,500 plus catch-up elective deferrals or Roth contributions.  If you make elective deferrals to your individual 401(k) totaling $26,000 for 2020 you will not be permitted to make any contributions to your permanent employer plan and you will not receive any matching contributions.  You'll want your employee contributions to your permanent employer's plan to be sufficient to obtain the maximum available match, then you can allocate the remainder of your $26,000 of employee contributions between the two plans.  Unless you have better investment options in the individual 401(k) or the permanent employer's plan limits employee contributions to less than $26,000 (to avoid failing nondiscrimination testing), simplest would be to just allocate all $26,000 of your employer contributions for 2020 to the permanent employer's plan.

 

Does your individual 401(k) permit employee after-tax contributions?  If not, $160,000 of net profit from self-employment is too little to permit a total of employee and employer contributions to the individual 401(k) of $63,500 since your employer contributions are limited to 20% of net earnings from self-employment.  Net earnings from self employment are net profit from self-employment minus the deductible portion of self-employment taxes. Without being able to make an after-tax contribution to the individual 401(k) your maximum employer contribution would be $31,571 if you max out the social security wage base at your permanent employer (resulting in the minimum possible deduction for self-employment taxes), a bit less if you don't.  And, as mentioned above, any amount you contribute to the permanent employer's plan further reduces the amount that you are permitted to contribute in total to the individual 401(k).

asquith62
Level 2

Individual 401k and company 401k

Thanks.. it is complicated..

 

in 2019.. made 122k as a contractor.. Contributed 25k to my individual 401k (over 55)  and then 22k from profit sharing.. for total of $47k

You are suggesting i can only contribute 20 pct of profit sharing, so need to take away 50 pct of my social security/medicare ($9300) and then 36k in healthcare..

 

So would only be able to contribute around 15k from profit sharing.. oh dear

dmertz
Level 15

Individual 401k and company 401k

Yes, your employer profit sharing contribution cannot exceed 20% of net earnings as I described, same as you did in 2018.

 

Your maximum employer profit sharing contribution for 2019 will be 20% of the result of subtracting Schedule 1 line 14 from your net profit on Schedule C line 31.   20% * ($160,000 - $9,300) = $30,140 profit sharing contribution.  Add $26,000 for your regular and catch-up elective deferral (assuming no contributions to the permanent employer's plan) and your total contribution to the individual 401(k) would be $56,140.  The "36k in healthcare" doesn't factor into it.

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