Self Employed 401k

[futurestrader39]

Hi, 

I run a single member LLC, my Business made a $19,500 contribution to my solo 401k. I still owe about $13,000 in taxes, is there a way to some how get this into a retirement account? 

I have read this link(https://ttlc.intuit.com/community/self-employed/help/what-is-a-solo-401-k/00/2483402 ) 

And I don't quite understand this section: 

"In addition to these employee contributions, you can make nonelective company contributions of up to 25% of compensation as defined by your plan. This compensation doesn’t include retirement plan contributions or the self-employment tax, which are deducted from your income. TurboTax will make these calculations for you (or tell you if you contributed too much to your Solo 401(k))." 

So can I add another 25%, I'd much rather spend as much money on myself as I can then give it to the gov. 

I read online, that the max employer contribution is $58,000. So could I add another $13,000 to that and not pay that in taxes or pay much less? It says the deadline for this is April 17th.

If you have any other suggestions please let me know. One of the main reasons I went with the full $19,500 is because I thought it was going to deduct my tax bill more then it did.  

Any clarification/direction would be extremally helpful, thank you for your time. 

[GeorgeM777]

Yes, you can contribute more money to your solo 401(k) plan.  The maximum contribution to your 401(k) is $58,000 and because you have contributed $19,500, you can still contribute additional funds to your 401(k).  

Another option you might consider is to make a contribution to a traditional IRA.  A contribution to a traditional IRA may reduce your taxable income however, because you are already covered by a retirement plan at work, income thresholds could become an issue which would prevent you from deducting your IRA contribution.  You could still make the contribution to the traditional IRA; however, your contribution (if you went over the income thresholds) would be "non-deductible," and you would want to prepare Form 8606 along with your return so you could track you non-deductible contributions.  TurboTax will prepare Form 8606 for you if required.

Here is link to traditional IRA income thresholds that you might find helpful.  New income ranges for IRA eligibility in 2021

Perhaps for now, your best option may be to just increase your 401(k) contribution to the point where your tax liability is more consistent with your financial goals.    

@futurestrader39

[futurestrader39]

Thanks for the info, even if it bump my max contribution up to $58,000 it only takes about $1000 off my FED income tax. I thought maxing out your 401k would help reduce your tax bill? Am I miss understanding something or am I entering this in, in the wrong spot?   

Below is a screen shot on where I am entering. 

Thanks again!

[GeorgeM777]

It is not clear why your tax liability decreased by only $1,000 after maxing out your 401(k) contribution.  Have you entered your 401(k) in the manner recommended by TurboTax?  Those steps are as follows:

1. In the Search bar, enter self-employed retirement plans (include the hyphen)  
2. Click on the jump-to link
3. Answer Yes on the screen Did you make a 2021 self-employed retirement plan contribution?
4. Answer Yes on the screen Did you contribute to an Individual or Roth 401(k) plan?
5. On the next screen, enter your contributions
6. If you have not made all your contributions for the tax year and would like TurboTax to calculate your maximum contributions for the year, check the box next to Maximize Contribution to Individual 401(k).

Continue through the pages until you reach Your Retirement Contributions.  This page will show a summary of your contributions.  This page will also show whether you have an excess contribution.  It will also show whether you still have time to contribute funds to your plan.  

In addition to the above, have you entered your estimated tax payments or other tax withholding on your return?

@futurestrader39

[futurestrader39]

Thanks for the break down, 

I followed your instructions and it still only shows roughly a $1000 decrease in my FED taxes. 

I have not entered withholds or estimates, I normally just pay a lump sum at the end of the year. 

I think im gonna have to use the "live expert" thing, I just dont understand what i've done wrong. 

My thinking is correct right? If I owe $13,000 after my 19,500 employer contribution, I should be able to add that $13,000 to my employer contribution and significantly reduce/eliminate my federal taxes( this is still under my max). 

I even deleted the 1099-R incase that was causing some issues and it's still the same.  

[dmertz]

The calculation of the maximum employer contribution is complicated.  Your maximum possible employer contribution is 20% (not 25%) of net earnings from self-employment, but could be less depending on the amount of net earnings.  Net earnings are net profit minus the deductible portion of self-employment taxes.

See the Keogh, SEP and SIMPLE Contribution Worksheet for the details of the calculation.  Unless your plan permits after-tax contributions (which would not reduce your tax liability), you are not permitted to contribute more than the maximum deductible amount.  If you contribute a greater employer contribution than permitted, it's subject to a 10% additional tax on Form 5330 (not support by TurboTax) every year until the excess is resolved.

Deductible contributions reduce the amount on which your tax liability is calculated.  It does not provide a 1-to-1 reduction in tax liability.

You can use TurboTax's Maximize box for an individual 401(k) to find the maximum combined employee elective deferral and employer contribution.

[SteamTrain]

I was wondering if the situation the OP is encountering is due to the SE tax.

Even after a large "proposed" extra 401k contribution, his tax only went down $1000.  IF he had that much profit from his business to make such a large contribution, his SE tax would remain and be a substantial amount, even if his personal income tax was reduced to a zero.  Yes?

Thus check line 22 of the 1040 before doing the proposed extra contribution, to see what regular income tax remains to be reduced.   (if I have my line numbers right)

[dmertz]

That's possible., but it seems more likely that the employer contribution that was entered (if not using the Maximize function) was more than permissible, particularly since there was mention of the overall $58,000 limit.  If the resulting tax liability of $12,000 ended up being entirely self-employment taxes, that implies a net profit of around $78,000 which seems to suggest that there would be some amount of income tax remaining.  It would take something like $44,000 of losses outside of the business to bring taxable income to zero.  The suggested $13,000 employer contribution also might be indicating net profit of around $78,000, and if taxable income is low enough to be in the 10% or 12% tax bracket, that would put the tax savings from a $13,000 deductible employer contribution somewhere between $1,300 and $1,600.