Understanding Maximum 401k Contributions
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Understanding Maximum 401k Contributions

I am the sole proprietor of a small business. I am using Turbo Tax for Home & Small Business, entering information in the SELF-EMPLOYED RETIREMENT PLAN section.

When it asks DID YOU CONTRIBUTE TO AN INDIVIDUAL OR ROTH 401 (k) PLAN, I say YES.

When asked for my 2018 CONTRIBUTION to these plans,  I check the box to MAXIMIZE MY CONTRIBUTION to a 401K.

Turbo Tax tells me that my MAXIMUM 410K CONTRIBUTION is $24,500.

When asked if I contributed to a Keogh, SEP or Simple Plan, I say NO.

When I get to my Retirement Contributions page is says that my MAXIMUM ALLOWED TO QUALIFIED PLANS is $38,973.

How did I get from $24,500 to $38,973?

The difference is $14,473.

Where do I contribute this amount of $14,473?


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Understanding Maximum 401k Contributions

$24,500 is your maximum employee elective deferral.  The $14,473 is the maximum employer contribution, 20% of your net profit minus the deductible portion of your self-employment taxes.  Assuming that you have no other employment that would put you over the Social Security wage limit, the $14,473 maximum employer contribution implies that your net profit from self-employment is about $80,555.  The calculations are shown on TurboTax's Keogh, SEP and SIMPLE Contribution Worksheet.

When you contribute to an individual 401(k), you designate the amount that is employee elective deferral ($24,500) and the amount that is employer contribution ($14,473).  The contribution form used by your 401(k) trustee is likely to have separate entries for each of these amounts.

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