Maximum Allowable Contributions to Solo 401k.

[rynlee]

In 2023, I contributed $2,050 as traditional funds to a Solo 401(k) and $8,000 as Roth funds to that same Solo 401(k).  After entering my business income and expenses, TT tells me that I can contribute $14,636 of additional funds (see attached screenshot).  However, I don't understand their calculations.  How are they determining $16,686 as the maximum allowable and $14,636 as the remaining amount I can contribute?

[dmertz]

TurboTax's screen that indicates how much more you can contribute is notoriously misleading.

[Disregard what follows in this post and see the follow-up posts below.]

I'm guessing that your net profit from self-employment is $17,955 and the deductible portion of self-employment taxes is $1,269.  Subtracting $1,269 from $17,955 leaves $16,686 available to contribute as a combination of employee traditional elective deferrals and Roth contributions, no employer contribution.

Guessing what TurboTax is trying to tell you, I think it's that you can contribute $14,636 beyond the $2,050 of traditional elective deferral that you entered.  You've already contributed $8,000 of that $14,636 as a Roth contribution, leaving only $6,636 that could be contributed as some combination of traditional elective deferral and Roth contribution.

If I've guessed your net profit incorrectly, let me know and I'll adjust the numbers.

[rynlee]

Thank you.  My net profit from self-employment is $28,914.

[dmertz]

Ah, disregard my previous calculations.  In your case your maximum permissible total contribution is $24,686, of which a maximum of $22,500 is a combination of employee elective deferrals and Roth contributions, and $2,186 [not $2,168 that I originally typed) is employer contribution.  Because you already contributed $8,000 as a Roth contribution and $2,050 as a traditional elective deferral or employer contribution, that leaves $14,636 that you can still contribute as a combination of employee and employer contributions.  If you contribute that all as a combination of traditional elective deferral and employer contribution, that would give you a total self-employed retirement deduction of $16,686.

[rynlee]

I’m still just a bit confused.  May I contribute the remaining $14,636 as employee and employer contributions in any amounts, or do I need to remain under $2,216 on the employer side?  Also, may I divide these between traditional and Roth however I like?

[dmertz]

Sorry, I mistyped the amount of the maximum employer contribution as $2,168.  I've corrected that to say $2,186.

Assuming that the $2,050 was employee elective deferral and not employer contribution, of the remaining $14,363 eligible to be contributed you can split $12,450 between employee elective deferral and Roth contribution any way you wish and you can contribute the remaining $2,186 as the employer contribution.   (Because at your net-profit level your contribution is limited to net profit minus the deductible portion of self-employment taxes, you contribute the maximum by maxing out employee contributions at $22,500 and then make the remaining portion as employer contribution.)

[rynlee]

I'm assuming  $14,363 should read $14,636.

Why do you say "between employee elective deferral and Roth"?

Can't contributions by both employee and employer be either traditional or Roth funds?

[dmertz · Accepted solution]

I guess my typing fingers are all mixed up today.  Yes, $14,636.

The SECURE 2.0 Act changed the tax code to allow employer contributions to be Roth contributions, however, it's up to your plan to permit such contributions and your plan agreement might not yet have been modified to allow them.  IRS Notice 2024-2 indicates that an employer Roth contribution is treated as a traditional employer contribution followed by an immediate In-plan Roth Rollover which must be reported by issuing a Form 1099-R for reporting on the tax return for the year in which the contribution is allocated to the account.  This suggests to me that an employer contribution for 2023 deposited in 2024 must be reported it as a traditional deductible employer contribution on your 2023 tax return and then report an In-plan Roth Rollover on your 2024 tax return, but given that this notice came out only a few weeks ago, there hasn't been much discussion on the issue.  If your plan permits In-plan Roth Rollovers, simplest would be to just make the employer contribution as a traditional deductible contribution and do an In-plan Roth Rollover which appears to accomplish exactly the same thing. 

If your intent is to maximize the amount that ends up in the designated Roth account, you would certainly want to make the remainder of your employee contribution be Roth.

[rynlee]

I appreciate all of your help!