Self employed Individual 401(k) calculation is wrong

[da001200]

For a self employed individual, with Individual 401(k) plan only. No other retirement plans. No IRAs, no Roth accounts. No W-2s. Only 1099 income.

When I select "Maximize Contribution to Individual 401(k)", TurboTax ignores the "Employer Matching (Profit Sharing) Contributions" completely. It considers only the "Elective Deferrals" and "Catch-Up Contributions",

to calculate how much more can be contributed.

But that exceeds the IRS limit of 67500 (for age over 50), when you add the "Elective Deferrals", "Catch-Up Contributions", "Employer Matching (Profit Sharing) Contributions" and what the software calculated that I can contribute more.

I even spoke with Intuit customer service (have a case number) and was told that this calculation is correct and the "Employer Matching (Profit Sharing) Contributions" is not counted towards the IRS limit of 67500. Is that correct, because it does not sound right to me.

[dmertz]

From your description I'm not sure what you are doing wrong, but TurboTax's Keogh, SEP and SIMPLE Contribution Worksheet properly implements the Deduction Worksheet  for Self-Employed in IRS Pub 560.

When you mark the Maximize box for an individual 401(k), are you leaving the blank the boxes for dollar amounts?

$67,500 is limit for the combined additions to your a 401(k), including employer contributions.  If your actual additions total more than $67,500, you'll have an excess contribution subject to a 10% penalty on Form 5330 (which TurboTax does not support) and TurboTax will limit your self-employed retirement deduction to $67,500.

Ignore the information that TurboTax provides in step-by-step mode regarding amounts that you can contribute, that information is a mess and can be misleading.  Look at the Keogh, SEP, and SIMPLE Contribution Worksheet itself.

[da001200]

No empty boxes.

I have values in "Elective Deferrals", "Catch-Up Contributions" and "Employer Matching (Profit Sharing) Contributions".

I can see the "Employer Matching (Profit Sharing) Contributions", in  in the Keogh, SEP, and SIMPLE Contribution Worksheet, Part I, 6e.

In Part III, field 21, it shows 67500.

On the Step-By-Step page, for the totals of "Your Retirement Contributions", it shows the "Individual 401(k)" (calculated as the sum of Elective Deferrals and Catch-Up Contributions); "Already Contributed" is equal to the "Individual 401(k)" value. "Maximum Allowed to Qualified Plans" is shown as 67500.

"Amount to Contribute by Plan Due Date" is shown as the difference between 67500 and "Already Contributed".

"Employer Match", shown below "Amount to Contribute by Plan Due Date", and it is not included in any of the above fields, on that same page.

Does it mean that I need to subtract "Employer Match" from "Amount to Contribute by Plan Due Date", in order not to exceed 67500?

[dmertz · Accepted solution]

If your intent is to maximize your deductible individual 401(k) contributions, leave the dollar boxes blank and mark the Maximize box, then refer to the Keogh, SEP and SIMPLE Contributions Worksheet for your allowable contributions.  Your maximum regular elective deferral of $20,500 will be on line 9, the maximum catch-up elective deferral of $6,500 will be on line 17 and, assuming sufficient net profit (something on the order of $215,000 or more),  your allowable employer contribution of $40,500 will be on line 13.

If you enter dollar values yourself and do not mark the maximize box, your regular elective deferral (or Roth contribution) is not permitted to exceed $20,500, your catch-up contribution is not permitted to exceed $6,500 and your employer contribution is not permitted to exceed on line 5 of the Keogh, SEP and SIMPLE Contribution Worksheet, with the total of the three not to exceed $67,500.

[da001200]

Thank you! This clarifies the whole thing.

I wish the Intuit customer service rep. knew this, and explained it when I called them, instead of telling me the non-sense that the profit sharing does not count towards the total, maximum allowed 401(k) contribution.

They should also fix the software to catch cases where one is exceeding the limit (I tried exceeding the limit and succeeded -  TurboTax did not catch it, even after it validated and verified everything, several times). The very least they can do is if one checks the Maximize My Return box, the software can automatically clear the three boxes above it - as simple as that.

[sthomp99]

Turbo Tax installed on my computer miscalculates maximum contribution to Self-Employed 401K.  All other worksheets and online calculators show $ 35,880 on $47773 income, $20,500 Salary Deferral + $8,880 Max Profit Sharing + $6,500 Catch-Up.  While Turbo Tax shows ONLY $27,000 as maximum contribution, which excludes the $8,880 Profit Sharing entered manually or selecting MAXIMIZE Box. 

Turbo Tax is wrong.  This should not be !!!

[dmertz]

TurboTax's correctly implements the Deduction Worksheet for Self-Employed from Chapter 5 of IRS Pub 560.  What TurboTax fails to do well is communicate to the user the permitted amount of employee and employer contributions.  $27,000 is the maximum employee elective deferral for someone age 50 or over in 2022 ($20,500 regular elective deferral plus the $6,500 catch-up deferral.  The rest of your permissible contribution is the employer contribution which TurboTax does determine when you mark the Maximize box.  Examine the Keogh, SEP and SIMPLE Contribution Worksheet for a better understanding of what TurboTax is allowing as the self-employed retirement deduction when you mark the Maximize box for a 401(k).

[ErnieS0]

TurboTax does produce a $35,880 max contribution on $47,773 of income if you check the maximize box.

See the Keogh, SEP, and SIMPLE Contribution Worksheet. If you are using TurboTax CD/Download you can see this worksheet by tapping Forms in the top right corner.

Then select Keogh/SEP Wks in the left column. After viewing, tap Step-by-Step in the top right where Forms used to be to return to the interview mode.

If you are using TurboTax Online, you can view your worksheets by tapping Tools in the left column, then Print Center.

@sthomp99