Contributing to 401k both as a full time employee and a business owner

[upti]

My wife works full time and also has a real-estate business. When filing taxes using turbo tax and going through the business section, I was asked about the "Individual and Roth 401(k) Plans". When I select "Maximize Contribution to Individual 401(k)", TT reduced my effective tax (which is great). But talking to a friend who is a CPA, I was told that we cannot contribute twice (once through her employer and once as a business owner). Is that true? Is the software incorrectly allowing us to contribute excess?

[DoninGA]

Of course you can have an employer sponsored 401(k) as an employee and also have a Solo 401(k) as a business owner.  

See this website for information - https://www.investopedia.com/ask/answers/100314/do-i-need-employer-set-401k-plan.asp#:~:text=If%20yo....

And - https://meetbeagle.com/resources/post/can-i-have-a-solo-401k-and-a-regular-401k

[upti]

Thank you for the response. We forgot to open Solo 401(k) before 12/31. Is there any other retirement plan we can contribute to? Is there still time to open Solo 401(k) for tax year 2022?

[DoninGA]

@upti No, the time to contribute to any type of retirement plan for tax year 2022 has passed.

[Opus 17]

You can have both plans but you may run into trouble if you exceed the plan maximums.  I want to ask @dmertz  to comment.

As an employee, you can contribute up to $22,500 of deferred salary for 2023.  If your employer also contributes (matching or not) the combined maximum for 2023 is $66,000.

As a self-employed person (sole proprietor, owner of an S-corp), you can also contribute up to $66,000 (or 25% of your net self-employment earnings, whichever is less).

https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people

I don't think this means that if you are an employee and also self-employed, you can contribute up to $132,000.  I think your overall limit is still $66,000.  However, within those limits you could certainly contribute $22,500 through the full time job, and if that job doesn't have a match, you could set up a solo 401K and contribute up to $43,500 from the business, assuming the self-employment job has enough net profits to support that level of contribution.  

You have to be careful with Turbotax.  If you click "maximize my contribution", hopefully it is taking 25% of your self employment profits, adding them to the 401k contributions from the W-2, and checking to make sure it is under the overall limit.  But that's an assumption.  Turbotax may also give you suggestions based on the idea that you are preparing your taxes before April 15.  

In general, it is too late to create or add any retirement funds for 2022.  However, if you live in an area affected by a declared disaster (like the California snowfalls and flooding, and certain hurricanes) the deadline to make IRA contributions for 2022 may be extended.  Check the IRS web site.

https://www.irs.gov/newsroom/tax-relief-in-disaster-situations

[upti]

I should have mentioned this earlier. I am in Sacramento county and the tax filing deadline has been extended to 15th Oct (or 17th). I believe there is still time to make the contribution. My options are Solo 401k or SEP. My question is, is there still time to open Solo 401k account if my wife doesnt have one? I think the deadline has passed but just want to make sure.

So TurboTax saying my wife can still make a deferred Self-Employed Retirement Deduction may not be true since the software may be incorrectly assuming she has the Solo 401k account? We may still be able to contribute to SEP? 

[Opus 17]

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@upti wrote:

I should have mentioned this earlier. I am in Sacramento county and the tax filing deadline has been extended to 15th Oct (or 17th). I believe there is still time to make the contribution. My options are Solo 401k or SEP. My question is, is there still time to open Solo 401k account if my wife doesnt have one? I think the deadline has passed but just want to make sure.

So TurboTax saying my wife can still make a deferred Self-Employed Retirement Deduction may not be true since the software may be incorrectly assuming she has the Solo 401k account? We may still be able to contribute to SEP? 

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There may be a difference between opening a new arrangement and making a retroactive contribution to an existing arrangement.  @dmertz  should be able to help with the details.  

Even if she was under the limit for the 401k at her regular employer, she can't make retroactive contributions because 401k contributions can only be made by payroll deduction.  But it may not be too late to open a solo 401k or SEP.  I also don't know if one has more long term advantages than the other.  

[dmertz]

The deadline to open the solo 401(k) is the due date of the tax return, including extensions, but for 2022 only an employer contribution is permitted if the plan is established after the end of 2022.  The SECURE 2.0 Act changed the tax code to also allow elective deferrals to plans established after year-end, but only for plan years beginning after 2022, which is not the case here.  What this means is that the amount that can be contributed to a solo 401(k) for 2022 is the same as the amount that can be contributed to a SEP IRA for 2022.  In your case the deadline for your wife to establish either plan and make the employer contribution is October 16, 2023.

Given that no elective deferrals (or Roth contributions) to the solo 401(k) will be possible for 2022, there is no concern about your wife exceeding the elective deferral limit for 2022 across multiple plans.  With a solo 401(k) established to accept 2023 elective deferrals, the per-individual elective deferral limit will become relevant.