Solo 401k and SEP through LLC

[julie482]

In prior years I was W-2 employee of an LLC and the LLC contributed max amount to a SEP on my behalf. Now I am a partner in the LLC they are still making the SEP contribution. I also have unrelated self-employment income and a solo 401k.

Now that my income is through the LLC and considered self-employment income Turbotax is saying I can't contribute to my solo 401k since a SEP contribution was made. It is my understanding that I can contribute to my solo 401k (determining the amount from my SE business profits NOT the LLC) even though a SEP contribution was made through the LLC. How do I get turbotax to allow this...I keep getting the warning that there is an excess contribution.

[AliciaP1]

All self-employed plans are considered for annual maximum contributions.  The excess contribution is calculated from the amounts you have entered for your SEP and solo 401(k) combined compared to these limits:

Per the IRS:

Contributions an employer can make to an employee's SEP-IRA cannot exceed the lesser of:

1. 25% of the employee's compensation, or
2. $66,000 for 2023 ($61,000 for 2022, $58,000 for 2021 and $57,000 for 2020)

And:

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:
  • $22,500 in 2023 ($20,500 in 2022; $19,500 in 2020 and 2021), or $30,000 in 2023 ($27,000 in 2022; $26,000 in 2020 and 2021) if age 50 or over; plus
• Employer nonelective contributions up to:
  • 25% of compensation as defined by the plan
• Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $66,000 for 2023 ($61,000 for 2022; $58,000 for 2021; $57,000 for 2020).

A business owner who is also employed by a second company and participating in its 401(k) plan (or SEP) 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.

[julie482]

Thank you for the detailed reply. Just so I'm sure I'm understanding this correctly...

Is the answer different when I was a W-2 employee and not a partner since the W-2 income is not self-employment income? I think what I'm asking is: are the total contributions also limited by person? I understand that the elective deferrals are limited by person but as an employee who did not contribute under my employer's plan am I free to contribute to my solo 401(k) even though my employer contributed the maximum total contribution allowed under the employer's plan.

[DavidD66]

You are limited to a total of $61,000 of contributions to your retirement plans from all sources.   That includes contributions made by the LLC, an elective deferral of up to 100% of self-employment income, up to $22,500, and any "employer non-elective contribution" from you self employment.  Your self-employment non-elective contribution is limited to 25% of compensation, which is defined as net earnings from self-employment after deducting both:

• one-half of your self-employment tax, and
• contributions for yourself.