Does TurboTax not correctly calculate the maximum solo 401k contribution if you also have a W-2 employer 401k?

[James16]

I'm looking at either a SEP IRA or a solo 401k plan to reduce taxes on the income I get from my single-member LLC side business (I also am a W-2 employee of a different company).   I already max out my 401k contributions at my W-2 employer.  Because the maximum employee contribution is aggregated across all 401k plans, I believe that for a solo 401k the only contribution I could make is the employer profit sharing amount, which would be the same as the maximum SEP IRA contribution (roughly 20% of the single member LLC income).  However, when I run the numbers in TurboTax and select "maximize contribution" it says that for 2018 my max contribution to a solo 401k would have been substantially higher than the SEP IRA amount.  It looks like it is ignoring the fact that I contribute to another 401k.  Does TurboTax not correctly calculate the maximum solo 401k contribution if you have a separate W-2 employer 401k?

[dmertz · Accepted solution]

You are correct, this is an unsupported calculation.  Since you've already made the maximum permissible elective deferrals at your W-2 employer, you can only make an employer contribution to the solo 401(k).  To allow TurboTax to calculate only the maximum permissible employer contribution you must select the Maximize box for either a Profit Sharing Keogh or a SEP contribution.  The result will be the same as for an employer-only contribution to the solo 401(k).

[JP21]

Where can I select Max box for only the Profit Sharing Keith or a SEP contribution?  I only have one box that is maximize the 401K contribution.

[JP21]

I found it.  Never mind.  Once I select that I want to contribute SEP or Profit Sharing Keogh, it allows me to maximize them.

[dmertz]

Yup, that's it.

[JimmeMcVid]

Where does TT show the calculations for the 401(k) allotment so I can check its work and see what exact amount I need to contribute to each part of the 401(k)? 

In my case: 

W2 company plan has 401(k). I contributed $9K

1099 self-employment business therefore has $10500 left for elective deferral

BUT, I can also contribute up to 25% of compensation for employer nonelective contribution. 

When I click calculate MAX, TT says the total I can contribute for self-employment 401(k) is $28K.  So I need to know what exact amount is elective deferral and what amount is for that 25% (employer nonelective contribution). 

Thanks for any help. 

[dmertz]

The calculation is done on the Keogh, SEP and SIMPLE Contribution Worksheet.  Use the Maximize function for a SEP or Keogh Profit Sharing contribution to have TurboTax calculate the maximum employer contribution.

The maximum employer contribution is not 25% of your net profit from self-employment.  The maximum employer contribution to a self-employed retirement plan is 20% of net earnings from self-employment.  Net earnings from self-employment are net profit minus the deductible portion of self-employment taxes.

[JimmeMcVid]

Ok, I will use the equation on this IRS page to calculate who much I can contribute to the solo 401(k) beyond the basic elective deferral. 

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

[jun_jazz]

Hi @dmertz 

I have a similar question. I am over 55.

With my employer, I was able to put 12.2K in my 401K - as reported on my w-2

But then I started a consulting business, and also opened a i401K.

When I click Maximize deductions, TurboTax comes up with a number of $33K that I can contribute. And Looking at the worksheet - I cannot see how it is computing that. Also It doesn't to seem to change when I change the value of 12.2K from my W-2.

So I computed the numbers manually using the worksheet from the irs. 
So the question is - Can I contribute 19,500 - 12,200 (from my w-2), + 6500 (catchup) + Employer Contribution (from my personal business)

Thaks

[jun_jazz]

And the follow-up is - When will TurboTax fix this BUG

[JimmeMcVid]

You seem to be getting the same problem I'm getting from TT. TT should be able to calculate our contribution amounts itself. 

Why do I now have to go to the IRS website and figure it out myself??? 

[dmertz]

jun_jazz, yes, that's the correct calculation.

TurboTax considers this to be an unsupported calculation rather than a bug.  It's on TurboTax's list of unsupported calculations (Other Deductions and Adjustments #6):

https://digitalasset.intuit.com/DOCUMENT/A5LpvlbgD/Unsupported_calcs_2020.pdf

[JimmeMcVid]

Ok, so I went to see where TT made the MAX 401(k) calculation - the Keogh, SEP and SIMPLE Contribution Worksheet. (it's confusing because the title should also say "individual 401(k)". 

I see now how it came up with $28821 in my case.  (part V line 1)   

That's the "Total maximum allowable deduction" ** not including defined benefit plan contribution**.  So I guess that means it does not include the elective deferrals I made to both my employer 401(k) and my individual 401(k) ?

So, since $19,500 - my employer salary deferral 401(k) contribution = $9816 , that's what I'll put for my solo 401(k) elective deferral.  And then for my deductible profit-sharing contribution, I can put $28821 or less???

Am I doing this right 🙂 

[JimmeMcVid]

I think what's important to remember is that we as self-employed individuals can make a ELECTIVE (SALARY) DEFERRAL to our 401(k) not to exceed $19500 (including what you gave to W2 401(k).  ** AND**. you can ALSO contribute a deductible portion as a profit-sharing part of your 401(k). So, in my case, it looks like that's an additional $28K. 

[JimmeMcVid]

Hm. But now I did the calculations on this IRS page for "plan contributions" and I get a much lower number: $7761.51.  

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

That's a big difference from $28K.  

I'm confused. 

Now I'm back to thinking TurboTax has a bug here.  First, it's not taking into account the W2 401(k) elective deferral I made. That should be easy to read. 

Plus, its Keogh/SEP worksheet may still not be calculating the right amount I can contributed to my individual 401(k) BEYOND the individual 401(k) elective deferral.