self employed Individual 401K Roth Contributions

[EricR]

I'm self employed, over 65, and want to contribute to my ROTH 401K.  Let's assume I made 200K net.  TurboTax will only allow me to contribute $23K as an elective deferral and $7,500 as a Catch up.  There is no place to enter the employer contribution for a ROTH 401K (since I'm solo, I'm the employee and employer). That's a significant error since I'm allowed to contribute up to $76,500 in 2024 to a ROTH 401K.  How do I enter the additional employer contribution of $46,000?

[dmertz]

With employee contributions of $30,500, an employer contribution would require something in excess of $234,000 of net profit from self employment.

I have not seen any guidance from the IRS regarding how to report Roth employer contributions.  For employer contributions to non-owner employees the contribution is to be reported as a traditional 401(k) employer contribution on the W-2 and the employer must issue a Form 1099-R with code G indicating as if there was then an In-plan Roth Rollover with the gross and taxable amounts both being equal to the amount of the employer Roth contribution.  Applying this same method to a self-employed employer Roth 401(k) contribution, you would enter it as a traditional employer contribution an then issue to yourself the aforementioned code-G From 1099-R (probably entered as a substitute Form 1099-R (Form 4852) so that explanation could be provided, but including Form 4852 will prevent you from being able to e-file.)  I don't know if this is what the IRS expects, but it produces the correct result.

[EricR]

According to Fidelity:

You can contribute up to $69k combined from Employee and Employer if your employer allows it.  Catch up is $7500.  Unlike Roth IRAs, Roth 401(k)s don't have any income limits. Regardless of how much you earn, you can contribute to a Roth 401(k) if your employer offers one.  Since I'm both the employee and employer, I can allow such contributions.  The problem is TurboTax doesn't have a way to take advantage of this without some convoluted workaround per your suggestion which will negate my ability to e-file.  See URL below. 

https://www.fidelity.com/learning-center/smart-money/roth-401k-contribution-limits 

[dmertz]

"You can contribute up to $69k combined from Employee and Employer if your employer allows it."

That's not the whole story because it does not address the limitations on employer contributions.  One of those limitations is that the employer contribution is not permitted to exceed 20% of net earnings from self-employment, which is why your net profit would have to exceed $234,000 (somewhat more if you do not also have $168,600 of W-2 income subject to Social Security taxes) to be eligible to make a $46,000 employer contribution.  However, you could make after-tax employee contributions, plan permitting, to bring you up to the $76,500 limit, provided that your net earnings are at least that much.  Net earnings are net profit minus the deductible portion of self-employment taxes.

As I said, as far as I know, the IRS has not provided any guidance as to how to report the amount of an employer Roth contribution to an individual 401(k).  Because it is not deductible, it could possibly simply be omitted from the tax return, but if you do so there would be no tax record of it and as a result there would be no checking against the 20%-of-net-earnings limit.  By entering it as a deductible contribution and an IRR, that checking gets done.  (I'll agree that the situation is a bit different with a sole proprietor than a separate employer and employee because the sole proprietor gets both the tax deduction for the traditional employer contribution and the income from the IRR cancel each other out on the same tax return, while with a separate employer and employee the employer's tax return shows the deduction and the employee's tax return shows the taxable income.)

[dmertz]

After thinking about this some more, I think I would enter the the Roth 401(k) employee contribution, mark the Maximize box to allow TurboTax to calculate the maximum permissible employer contribution, then unmark the Maximize box and enter the employer contribution nowhere in TurboTax.  That would help ensure that you don't make an excess employer contribution while still treating the employer contribution as not being deductible.

[EricR]

Thank you so much for all your help! 

[jaxhunt]

I have same question and came across this:

According to the IRS's guidance, Roth employer contributions to a 401(k) plan are effectively required to be reported as if the contribution had been made on a pre-tax basis, and then immediately converted to Roth. Which makes sense in that it doesn't require wholesale changes to existing tax forms or payroll systems, but does have an unintended side effect for self-employed owners of solo 401(k) and SEP plans who are also eligible for the Sec. 199A deduction for Qualified Business Income (QBI): Because the business's QBI is reduced by the amount of any deductible retirement plan contribution, the fact that Roth employer contributions are reported initially as deductible contributions mean that they reduce the business owner's Sec. 199A deduction, even though they don't actually reduce their taxable income (since the income from the Roth contribution is added back in the form of the "phantom" Roth conversion as required by the IRS's guidance).

Accordingly, business owners who contribute to a solo 401(k) or SEP plan and are also eligible for the Sec. 199A deduction may want to avoid making Roth employer contributions, even if their plan provider allows it. Fortunately, however, there is another way to maximize Roth contributions to a solo 401(k) plan that doesn't affect QBI in any way: If the plan allows employee contributions to be made on an after-tax basis, the business owner can simply make after-tax contributions (all the way up to the $69,000 total contribution limit) and convert them to Roth, which is a tax-free transaction since the contributions weren't deductible to begin with. And because there's no deduction for the contribution, it won't affect the QBI calculation in any way.

The key point is that, as business owners decide on their solo 401(k) contributions for the year, they may be unaware of the effects that making Roth employer contributions might have on their Sec. 199A deductions.

[EricR]

Thank you!