solo 401K roth contribution entry in turbotax

[kkbach]

i am a sole proprietor with a solo 401K. I contribute to the solo401K via employee deferrals and to my roth solo 401K via employer contributions. When I enter the roth solo 401K employer contributions in turbo tax, it appears to be taxing me a second time on the income. It has already calculated my income tax and appears to be treating this contribution as a conversion of formerly tax deferred contributions. Please help.

[dmertz]

Unless the employer contribution is larger than the permissible elective deferral, it would have been far easier if part of the employee contribution was Roth and the employer contribution was entirely traditional.

Roth employer contributions to your individual 401(k) are only permitted if your 401(k) plan agreement has been updated to permit such contributions.

The IRS has not yet provided guidance on how employers are to report Roth employer contributions to qualified retirement plans.  However, if the one is to take a hint from how the IRS says Roth SEP contributions to be reported, one might guess that employer contributions to the designated Roth account in the 401(k) will need to be reported as a regular deductible employer contribution to the traditional 401(k) account followed by an In-plan Roth Rollover of that amount (without regard to any after-tax funds the employee might have in the traditional account), with the IRR reported on a Form 1099-R for the year in which the deposit to the designated Roth account occurs.  The consequence of this would be that taxable income would be reduced in the year for which the contribution is made and is increased by the same amount in the  year that contribution is deposited.

[kkbach]

you are amazing. Thank you so much. This is kind of what I thought and I so appreciate the validation. The employer contribution (I'm the employer, of course) is greater than the employee (which is 30,000 in my case as over 50). So it seems I'm faced with just not entering the employer contribution into turbo tax if it is roth solo 401K as it doesn't process it correctly. Thank you so much. 

[dmertz]

I might consider entering it as a traditional employer contribution just to allow TurboTax to do the calculation to verify that it doesn't exceed the maximum permissible employer contribution, then remove the employer contribution.

[kkbach]

Further to this, only this year did I realize that we were being doubly taxed on the Roth solo 401K  contribution when I entered it into turbotax. I've done these entries '19, '20, '21, and '22, so I believe we have way overpaid as we paid tax on my 1099 income and then it taxed it again seemingly recording the roth solo 401K contribution as a conversion of previously tax deferred income vs. a brand new contribution.

[kkbach]

Thank you, again. Like minds. That is exactly what I did. I further confirmed the contribution amount in two other calculators that presented identical amounts. THank you so much.

[dmertz]

Employee Roth contributions are not deductible.  Employer Roth contributions were not permitted prior to 2023.  TurboTax does not treat Roth contributions as conversions.

[kkbach]

Sorry. My error. Yes, the Roth contribution was employee salary deferral, not employer contribution. 

[dmertz]

Then entry into TurboTax is as simple as putting the amounts in the correct boxes.  While a Roth contribution is nondeductible, it's still subject to the same limits as traditional elective deferrals.

[kkbach]

Agreed. However, when one enters the Roth solo 401K contribution, taxes shoot upward in TurboTax. It is the allowable, calculated contribution amount for a solo401K employee deferral portion. This is a double taxation in that the taxes have already been calculated having entered income and expenses for Schedule C and showing that income. Then, when entering the roth piece, taxes shoot up again on that income. The tax burden should remain flat with the Roth entry. Instead, turbotax re-taxes that amount. 

[dmertz]

You mentioned having made deductible contributions to the solo 401(k).  If you have entered those deductible contributions and then enter a Roth 401(k) contribution that results in an excess contribution, the deduction for the deductible contributions will be reduced, increasing your tax liability.

Examine the Keogh, SEP and SIMPLE Contribution Worksheet to see the calculations.

[kkbach]

Yes, however the Roth contribution is not excess in any of these cases. For '23, my calculated allowable Roth Solo 401K contribution as employee deferral is 30,000 (22,500 + 7500 >50) and the employer Traditional Solo 401(k) contribution is $36,485. I am a sole proprietor/LLC with a long standing solo401(k), wherein the '23 limit is $73,500 (>50) . I have run these contribution amounts thru multiple calculators (fidelity, vanguard, turbotax's automated maximize) and all produce the exact same amount. Meanwhile, the taxes are previously calculated given my Schedule C entries. I then input the traditional contribution, tax burden reduces. I input the Roth, and it increases, which makes no sense as the tax burden was already built in with my entries. It is a double tax trap within TurboTax as it doesn't produce or allow for producing a form 8606.

[dmertz]

With no other source of Social Security tax being paid (no W-2), an employer contribution of $36,485 implies net profit from self employment of about $188,655.  If your net profit is less than that, an employer contribution of $36,485 would be partially an excess contribution.

If in Part I of the Keogh, SEP and SIMPLE Contributions Worksheet line 7a shows $22,500, line 7c shows $7,500, the Maximize box on line 6f is marked or you have $36,485 on line 6e, and in Part III line 1a shows $188,655, you should see a deduction of $36,485 on Part V line 2.

Note that if you have the Maximize box marked, until you enter the $22,500 and $7,500 as Roth contributions, TurboTax will assume that you made those contributions as deductible elective deferrals.

Nothing about 401(k) contributions goes on Form 8606.  A 401(k) is not an IRA.

[kkbach]

Thank you. Yes. Your income calculation is correct.  Net profit amount was just shy of $188+, so the contribution amount is correct. I did not check the maximize contribution button until after I did all other entries, as I wanted to watch how turbotax managed these calculations and the tax burden in real time. When I checked the box and then made the entries is when it did the double taxing.

[dmertz]

My calculation was off a bit because I used the wrong year's Social Security wage limit.  Unless you had some amount of Social Security tax paid shown on a W-2, an employer contribution of $36,485 for 2023 would require at least $194,970 of net profit.