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saudahmirza
Level 3

Solo 401k Contribution limits

I have a employer sponsored 401k which I have had the elective maximum contribution of $19k for 2019. 

Separate form the above W2 income, my spouse and I have 1099 income and we will be electing to be treated as Qualified joint venture. 

1. If my income from the joint venture is say roughly $140k, then my contribution limit for my solo 401k will be roughly $44k. Since this qualified venture is separate from my W2, employment I would technically have a second limit of $56k though I do not make enough to get to that limit. 

2. My spouse income from the joint venture is $30k, thus the limit here would be roughly $23.5K

I just want to make sure I understood this correctly. 

I used this to come up with the rough limits -> https://www.bankrate.com/calculators/retirement/self-employed-401-k-calculator.aspx

Finally, I assume I can capture all this in TurboTax?

12 Replies
ColeenD3
Expert Alumni

Solo 401k Contribution limits

The BankRate site used 2017 information. Please see the site from the IRS, although it seems to be using 2020 information.

 

Contribution limits in a one-participant 401(k) plan

The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:

  • Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
    • $19,500 in 2020, or $26,000 in 2020 if age 50 or over ($19,000 in 2019, or $25,000 in 2019 if age 50 or over); plus
  • Employer nonelective contributions up to:
    • 25% of compensation as defined by the plan, or
    • for self-employed individuals, see discussion below

If you’ve exceeded the limit for elective deferrals in your 401(k) plan, find out how to correct this mistake.

 

Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $57,000 (for 2020; $56,000 for 2019).

 

Example: Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2019. He deferred $19,000 in regular elective deferrals plus $6,000 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2019 were $37,500. This is the maximum that can be contributed to the plan for Ben for 2019.

 

A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan. He must consider the limit for all elective deferrals he makes during a year.

 

Solo 401k

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dmertz
Level 15

Solo 401k Contribution limits

With $140k of net profit allocated to you, the amount that you are eligible to contribute to the solo 401(k) is not about $44k unless your solo 401(k) permits after tax contributions.  Without the ability to make after tax contributions and having already made the maximum elective deferral to the plan at the W-2 employer, your own contribution to the solo 401(k) is limited to only the maximum permissible employer contribution, about $26k.

 

TurboTax's Maximize function for a individual 401(k) contribution does not support the case where elective deferrals or Roth contributions are also made at a different employer.  Since you made the maximum elective deferral at your W-2 employer, you need to cause TurboTax to calculate only the permissible employer contribution by using the Maximize function for either a SEP contribution or a Keogh Profit Sharing contribution for your contribution.  You would still use the individual 401(k) Maximize function to determine your wife's maximum total contribution, assuming that she has not made any elective deferrals to another employer's plan.

saudahmirza
Level 3

Solo 401k Contribution limits

Thank you so much for the clarification. That was very helpful. 

I assume for my spouse who only has a solo 401k, that reporting will be much more straightforward within TurboTax?

Also, could you recommend a reliable calculator to make sure we are making the right level of contribution? I am unable ot find it in the IRS documentation. 

dmertz
Level 15

Solo 401k Contribution limits

Yes, with only the solo 401(k), your wife can just use the Maximize function for an individual 401(k) to determine her own maximum individual 401(k) contributions.

 

TurboTax just implements the Deduction Worksheet for Self-Employed in Chapter 5 of IRS Pub 560 as TurboTax's Keogh, SEP and SIMPLE Contribution Worksheet, so you can review the calculation there (taking into account that you can't make an elective deferral to your own solo 401(k):  https://www.irs.gov/pub/irs-pdf/p560.pdf

jkindem
Level 1

Solo 401k Contribution limits

I thought I understood it correctly, that if my wife is not working I could contribute into a spousal IRA contribution of 6000 (she has a small at home business which is not profitable selling nailstrips), How does my contribution to her IRA figure in the calculation as turbotax more or less says I cannot do it.

dmertz
Level 15

Solo 401k Contribution limits

Does TurboTax say the contribution is an excess contribution (which would only be the case if you don't have sufficient compensation to support her traditional IRA contribution after reducing you compensation by retirement contributions of your own), or is TurboTax just saying that her traditional IRA contribution is not deductible (because of MAGI exceeding the limit for the filing status)?

ThomasM125
Expert Alumni

Solo 401k Contribution limits

You can make a deductible contribution to your spouse's IRA based on your earned income even though she does not have any earned income under some circumstances.

 

The contribution may be limited based on your earned income, your ages and whether you indicated that she has a retirement plan associated with her business. 

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jkindem
Level 1

Solo 401k Contribution limits

Yes, it says we both have an excess contribution.  Let me add more color to the situation.

 

I am self-employed and have a net profit of ~110k (after deducting medical premiums). My wife runs a small nailstrip business which is not profitable. I set up a solo-401k at the end of last year and used tt2019 to estimate how much I could contribute to my solo-401k and her contribution, and then made those contributions at the end of last year. Turns out TT2020 is giving me a completely different answer when running the maximizer saying I significantly overfunded, oddly TT2019 is where I got the numbers from. The entry for this year looks different from last, and there is not a specific box for doing maximization -- only keogh maximizing boxes, so I clicked those. That said there is a very long explanation (from "Self-employed retirement plans link" Pasted below). The question is whether TT maximizing this correctly for the instance of a solo-401k? And how does a contribution to my wife via a spousal contribution get limited in this contribution?

 

******* from TT

The Keogh, SEP and SIMPLE Contribution Worksheet allows you, as a self-employed individual, to enter your plan contribution amounts for a retirement plan you have for your business. If desired, you may request the program to calculate the maximum deductible amount you may contribute to your defined contribution KEOGH, Individual 401(k) or SEP plan. The maximum amount which you may contribute to a SIMPLE plan is $13,500 ($16,500 if age 50 or over)for 2020 and does not depend on your earnings, except that you must have at least $13,500 ($16,500 if age 50 or over) in earnings. This does not include any employer matching contributions made to your own SIMPLE plan.

Numerous changes were made to pension plan laws in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTERRA). The pension laws may be complicated and confusing. For instance, the amount that can be contributed to a profit-sharing plan is 100% of a participant's compensation. However, the amount that can be deducted is limited to 25% of all participant's compensation. Also, the deduction for a profit-sharing plan increased from 15% to 25%. This makes the amount equal to what can be deducted for a money-purchase plan. Since the money purchase plan is a mandatory contribution by the employer, this change made money-purchase plans irrelevant. Another change allows members of certain religious faiths to get a contribution (and deduction) to a Keogh plan if the only reason they could not was because they were not subject to self-employment tax.

The maximization calculations assume you have modified your pension plan to be in compliance with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTERRA).

The maximization calculations will work for you IF your business and plan circumstances meet the following specifications:

First, the calculations assume that your plan allows the MAXIMUM deductible contribution for a profit sharing (25%), money purchase (25%) or SEP plan (25%). In the cases of profit sharing Keogh plans and SEP plans, we also ASSUME that this is the amount YOU wish to use in the maximization. With these plans you generally may choose to contribute any percentage up to the maximum; if you choose a percentage less than 25%, the maximization calculations won't work for you. Instead, calculate your contribution manually and enter the amount(s) on lines 2a or 4a as appropriate. Similarly, if your money purchase plan provides for less than 25%, you must calculate your maximization yourself and enter the amount directly on line 1a. If any of these situations apply, don't check the maximization boxes.

Second, the program will ALWAYS look at the net self-employment income included in your return, EVEN IF you don't select the maximization boxes. This means that the worksheet will still limit your contribution based upon the self-employment income we've defined, even if you've calculated the amount yourself and entered it on lines 1a, 2a, and/or 4a. We'll explain just what we use as net self-employment income shortly, but IF YOU DISAGREE with the amount we've calculated for net self-employment income, enter an adjustment to income in Part II of this worksheet to bring the income amount in line with your calculations. For example, we don't include S Corporation pass-through income as self-employment income for calculating allowable Keogh or SEP contributions (per Appellate Court ruling, Ninth Circuit). If you believe otherwise, adjust your self-employment income number by using Part II. NOTE: Any adjustment entered in Part II will adjust your net self-employment income for the calculation of the maximum allowed deduction. It will NOT adjust your self-employment income for purposes of calculating your self-employment tax. If this adjustment is needed to compute the correct self-employment tax, the adjustment must also be entered on the Schedule SE Adjustment Worksheet. Your contribution to a SIMPLE plan will be limited to $13,500 ($16,500 if age 50 or over) plus any matching contribution.

Third, the worksheet is NOT designed to accommodate multiple plan contributions. It is designed for single-plan situations. If you have one or more business activities with multiple self-employed retirement plans, review your plans' circumstances carefully. Often you will be able to use the maximization options offered under "Money Purchase Plan or Multiple Plans" (line 1), but you should review the help for lines 1a through 1d below to determine if the calculations will work for your situation. Note that you may have a defined benefit plan contribution AND a defined contribution or SEP plan contribution without encountering problems.

Fourth, if you have a special situation with your plan which allows you to contribute more than the maximum deductible amount that we've calculated, you may override the amounts calculated on Form 1040, line 28 OR line 9 of this worksheet. However, the calculations of "modified adjusted gross income", used in calculating such deductions as passive activity losses, Series EE Bond exclusions AND IRA deductions, must rely on non-overridden numbers. Therefore, if you take the step of overriding Form 1040, line 28 OR line 9 of this worksheet, you MUST recalculate your modified adjusted gross income and review all areas in your return in which this number is used.

In lieu of overriding on the Keogh, SEP and SIMPLE Contribution Worksheet OR on Form 1040, line 28, you may choose to enter your computed contribution as a "defined benefit plan" contribution on line 3a. If you do this, be sure to review Form 1040, line 28, and remove (through overriding) the "DB" entry to the left of the line. This "DB" designation marks the plan as "defined benefit."

The computation of net self-employment income includes the following:

Schedule C net income (loss)
Schedule F net income (loss),
Form 6781 net profit (loss) that is marked as self-employment income,
Schedule K-1 for partnerships (Box 14, with Code A, self-employment income), and
any income adjustment entered in Part II of the Keogh, SEP and SIMPLE Contributions Worksheet.

This total is adjusted by one-half of the self-employment tax attributable to these amounts and one-half of the self-employment tax from a minister's housing allowance if the allowance is entered from a Schedule C.

If the net self-employment income is not subject to self-employment tax because of an exemption for clergy or religious group (i.e., you have filed a Form 4029-Application for Exemption from Social Security and Medicare Taxes and Waiver of Benefits or Form 4361-Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Relgious Orders and Christian Science Practitioners), you can still take a Keogh, SEP and SIMPLE deduction.

It does NOT include any amounts entered directly on the Schedule SE Adjustments Worksheet on the following lines:
  Part I, line 3 - Other SE farm profit or (loss)
  Part I, line 4 - SE exempt farm profit or (loss)
  Part II, line 4 - Other SE income reported as income on Form 1040, line 7
  Part II, line 5a - Clergy Form W-2 wages
  Part II, line 5b - Clergy housing allowance if entered on Form W-2 worksheet
  Part II, line 5c - Clergy business deductions
  Part II, line 6 - Other SE nonfarm profit or (loss)
  Part II, line 7 - SE exempt nonfarm profit or (loss)
  Part II, line 9 - Notary Public income
  Part III - Farm optional income
  Part IV - Nonfarm optional income.

If you want any of the excluded amounts included for a Keogh, SEP, or SIMPLE contribution, enter the adjustment in Part II of this worksheet.

Note also that the plan percentages we use apply to the RESULT of this equation: net self-employment income - self-employment tax deduction. So, if your plan percentage is an effective 20%, it'll be 20% of the result of (net self-employment income less self-employment tax deduction). 

dmertz
Level 15

Solo 401k Contribution limits

Between 2019 an 2020 nothing has changed in TurboTax regarding these contributions or their entry other than the slight updates to the contribution limits.

 

It appears that you have skipped over the solo 401(k) (individual 401(k) section and are instead mistakenly trying to using the Keogh, SEP and SIMPLE contribution page that follows.  View TurboTax's Keogh, SEP and SIMPLE Contribution Worksheet to see the calculation.

 

That still doesn't explain why you are seeing TurboTax indicate an excess contribution for a traditional IRA contribution.  $110k of net profit is sufficient to support the maximum individual 401(k) contribution plus traditional IRA contributions for both you and your spouse, so you must have made some error entering your self-employment income or expenses.

jkindem
Level 1

Solo 401k Contribution limits

Ok, so changing where I entered the contribution amounts to the 401k fixed one issue, but it still shows Susan as over contributing because she had no positive net income on her business. The question is how/where do I enter the spousal contribution to Susan? Or am I limited to contributing $26,000 total, meaning if I make a $7,000 contribution to Susan, am I then limited to $19,000 that I can contribute to my own? It was my understanding that the spousal contribution was in addition... Maybe there is some other check-box I need to check with respect to a spousal contribution?

dmertz
Level 15

Solo 401k Contribution limits

The sum of any contributions you made to a self-employed retirement plan plus the IRA contributions cannot exceed your net earnings.  But ~$110k of net profit is sufficient to cover all of this.

 

Are you filing jointly?  Joint filing is a requirement to be able to make a spousal IRA contribution.

jkindem
Level 1

Solo 401k Contribution limits

Turns out the spousal contribution needs to go in the IRA section not in the individual 401k section under business -- this was my mistake, but it would be helpful under the business section if they had a link that said something about this.

 

Thanks, for the help

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