Self employed Individual 401(k) calculation is wrong

Forum|Forum|3 years ago
March 15, 2023
1 reply
9 views

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.

Best answer by dmertz

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.

D

dmertz

Level 15

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.

D

da001200Author

Level 2

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?

D

dmertzAnswer

Level 15

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.