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Level 1

solo 401k contribution for 1099 (but when also having an employer sponsored 401K from W-2) what is the best option?

Current situation:

-I and my spouse both make max contributions ($19,500 each/year) to employer sponsored 401k.

-Both also have each IRA accounts and make max contribution.

-My spouse also has a small side job and makes 1099 based revenue which is more/less than $30,000 per year and the net income is mostly around $5,000 or so.

(sole-proprietor business and she is the only one employer/employee.)

 

We are considering to set up solo 401k for her side job and wondering how much can be contributed for the tax deferral benefit.

According to my research, profit sharing in solo 401k seems to be the only option for the additional tax deferral/saving since she already makes a max contribution to her current 401k.

 

I also tried with turbo tax, simulating with the last year's tax filing.

There is a click-box option to calculate the maximize contribution automatically in the middle of the retirement plan section, and it seems that it calculated the maximum contribution amount as the business net income less 1/2 of self-employment tax.

For example, if net income is $4,500 and 1/2 SE tax is 500, it gives $4,000 as the maximum contributable amount.

 

Can we open up the solo 401k account, calculate the maximum contributable amount with the turbo wax as the above when the net income and SE tax are available at the year end and contribute that amount to the profit sharing?

 

I also referred to the IRS website to get some idea, but I am not sure.

It looks almost similar to what Turbo tax calculated, except she doesn't have any plan contribution rate for this.

https://www.irs.gov/retirement-plans/self-employed-individuals-calculating-your-own-retirement-plan-...

 

Any advice and comment will be appreciated!

1 Best answer

Accepted Solutions
Level 15

solo 401k contribution for 1099 (but when also having an employer sponsored 401K from W-2) what is the best option?

TurboTax does nor support the calculation of the maximum permissible solo 401(k) contribution when the individual also contributes to another employer-sponsored plan.  The individual must do their own calculation to ensure that the maximum permissible total employee contribution to all 401(k) plans for the year is not exceeded.

 

You are correct,  Because your spouse is already made the maximum permissible total elective deferral to the employer-sponsored 401(k), your spouse can only make the employer contribution to a solo 401(k), no employee elective deferral.  Since the employer contribution to the solo 401(k) would be the same as the employer contribution to a SEP IRA, it would probably make more sense for your spouse to to just establish a SEP plan rather than a solo 401(k) plan.  Opportunities for distributions from a SEP IRA are generally less restricted that for distributions from a 401(k).  Even if your spouse established a solo 401(k) and made the employer contribution from self-employment income to that plan rather than to a SEP-IRA, your spouse would have to use the Maximize function for a SEP plan or a Profit Sharing Keogh plan so that TurboTax would not mistakenly calculate any employee elective deferral to that plan.  with net income of $4,500 and the deductible portion of SE tax being $500, the maximum contribution would be $800, all employer contribution.

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3 Replies
Level 15

solo 401k contribution for 1099 (but when also having an employer sponsored 401K from W-2) what is the best option?

TurboTax does nor support the calculation of the maximum permissible solo 401(k) contribution when the individual also contributes to another employer-sponsored plan.  The individual must do their own calculation to ensure that the maximum permissible total employee contribution to all 401(k) plans for the year is not exceeded.

 

You are correct,  Because your spouse is already made the maximum permissible total elective deferral to the employer-sponsored 401(k), your spouse can only make the employer contribution to a solo 401(k), no employee elective deferral.  Since the employer contribution to the solo 401(k) would be the same as the employer contribution to a SEP IRA, it would probably make more sense for your spouse to to just establish a SEP plan rather than a solo 401(k) plan.  Opportunities for distributions from a SEP IRA are generally less restricted that for distributions from a 401(k).  Even if your spouse established a solo 401(k) and made the employer contribution from self-employment income to that plan rather than to a SEP-IRA, your spouse would have to use the Maximize function for a SEP plan or a Profit Sharing Keogh plan so that TurboTax would not mistakenly calculate any employee elective deferral to that plan.  with net income of $4,500 and the deductible portion of SE tax being $500, the maximum contribution would be $800, all employer contribution.

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Level 1

solo 401k contribution for 1099 (but when also having an employer sponsored 401K from W-2) what is the best option?

Many thanks!

 

Was the contribution $800 based on solo 401(k) or SEP IRA?

 

Do both methods have the same calculation for the contributable amount by 20% of net income after deductible portion of SE tax?

Level 15

solo 401k contribution for 1099 (but when also having an employer sponsored 401K from W-2) what is the best option?

Either one since no employee elective deferral or Roth contribution to the solo 401(k) would be permitted due to already having maxed out the maximum $19,500 employee contribution at the W-2 employer.  The calculation of the maximum employer contribution to a SEP plan and solo 401(k) plan is the same for both.

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