Maximize contribution to Individual 401(k)

[User ID 4770519]

I am an over 50 sole proprietor with a solo 401(k). I'm using Turbotax Home and Business.

Current 2021 contributions:

Individual 401(k)

Elective deferrals: $2,083

Catch-Up Contributions: $3,500

Roth 401(k)

Elective deferrals: $17,417

When I check the box for Maximize Contribution to Individual 401(k), I am told: Using the maximum allowable contribution, you can defer a maximum of $23,562 to a 401(k) plan.

When I get to the summary screen, it says:

Here are your self-employed retirement deductions using the maximum allowable contribution.

Individual 401(k) $5,583

Roth 401(k) $17,417

Already contributed: $23,000

Maximum Allowed to Qualified Plans: $10,208

Amount to Contribute by Plan Due Date: $4,625

Where are these last two figures coming from, and what do they mean?

[RaifH]

The maximum allowed is calculated based on the maximum you can contribute as an employee ($19,500 + $6,500 for being over 50) plus the amount you can contribute as the employer (20% of self-employment income after half of the self-employment tax) minus your Roth 401(k) contribution.

To get to the maximum contribution which will maximize your tax deduction this year, you would contribute another $4,625 to your Solo 401(k). You can also opt to contribute that $4,625 to your Roth, but it would not yield any tax advantage this year. 

[User ID 4770519]

But $23,000 plus $4,625 does not equal the $23,562, which Turbotax said is the maximum I can defer.

Where is this number ($4625) coming from?

And what does: "Maximum Allowed to Qualified Plans: $10,208" mean?

[Who Dat]

Hi RaifH. 

I hope you can help me with this tax question….?  I am LLC SCorp

2021, I (employer) contributed $26000 (with catch up) to my self directed 401K from my business checking account directly to Fidelity.    I coded this in QB as Self Directed 401K contribution EXPENSE

So, on 1120S, I apply this $26,000 amount on line 8 (salaries and wages).  Why line 8 instead of line 17 or 18?  Because according to the 1120S instructions on Line 17 (second paragraph), it stated “If the corporation contributes to an individual retirement arrangement (IRA) for employees, include the contribution in salaries and wages on page 1, line 8, or 1125-A, line 3, and not on line 17.

I thought I ask this question to see if you would agree.   If I, the employer, contributed $26,000 to my self directed 401K, it should be treated as an expense.   To record the expense on 1120S, then it should be on Line 8, salaries and wages.  Agree or disagree?  Obviously, the purpose of expensing the $26,000 is to lower my tax basis.   OR, do you believe this $26,000 amount should be from my owners withdrawal?  Your answer will directly impact my P&L. 

In addition to doing the manual 1120S form, I also bought the 2021 TurboTax Business edition that can do 1120S.  The instruction is very vague as to how to handle this $26,000 employer contribution using company's fund. 

Assuming you agree that it cab be expensed, my next question is how to code this $26,000 on W2 form?   Would it be $26,000 on line 14, OTHER  and check off “Retirement Plan” in Box 13?  If not, how would you record $26,000 for my self directed 401K?  I inadvertently omitted this $26,000 at the time I filed my W2 and W3 last month.  I will have to amend accordingly.

This is my first year doing SCorp for 2021.  This $26,000 contribution is o help lower my tax basis.   I’m learning day by day doing taxes while also running my biz.   HELP!  TIA!

[dmertz · Accepted solution]

TurboTax's individual 401(k) summary page has been a mess since its inception, more misleading than helpful.

Your total maximum permissible contribution to the plan is $27,625, the amount of net profit that remains after subtracting the deductible portion of self-employment taxes.

$10,208 is the maximum permissible deductible amount given that you have made $17,417 of Roth contributions and you maximize your contributions.

$4,625 is the difference between the amount that you have already contributed, $23,000, and the $27,625 maximum total contribution.

$23,562 is the number on line 14 of the TurboTax's Keogh, SEP and SIMPLE Contribution Worksheet.  It is not the maximum that you are permitted to contribute despite what it says on the summary page.  Line 14 in your case is your net profit minus the deductible portion of self-employment taxes minus one half of (net profit minus the deductible portion of self employment taxes minus the $19,500 regular elective deferral limit).  That calculation simplifies to:

(net profit minus the deductible portion of self-employment taxes plus $19,500) / 2

which is a useless number to provide on the summary page.  It tells you nothing about the amount that you have left to contribute or how you need to split up your contributions into employee elective deferrals and employer contributions.  You are far better off looking at the Keogh, SEP and SIMPLE Contribution Worksheet than TurboTax's summary page.

[User ID 4770519]

@dmertz ,

Thank you for explaining where the $4,625 and the $10,208 numbers came from. That part makes sense to me now.

Regarding the $4625 I can still contribute, does it matter whether I contribute as an employee or employer?

[dmertz]

@User ID 4770519 , you can contribute a maximum of an additional $3,000 split between traditional and Roth catch-up (your maximum permissible employee contribution is $26,000 for 2021 and you've already contributed $23,000) and whatever remains of the $4,625 after that can be contributed as an employer contribution.