How to tell Turbotax employer contribution to solo 401k is Roth?

[dd90]

I am self-employed, and have a single-member LLC with a solo 401k (actually two 401k accounts: traditional and Roth).

Older guidance said "Employer (profit-sharing) contributions may not be Roth funds."

However, Forbes says:

Before the passing of the [Secure Act 2.0, Dec 2022], employer funding could only be pre-tax. Now, effective immediately, plan sponsors may choose to offer non-elective or employer matching contributions to Roth accounts.

I would like to make contributions to the Roth solo 401k from both employer and employee side.

However, the Turbotax screen to enter these contributions ("Individual and Roth 401(k) Plans", get there with search, enter "individual 401k", click "Jump to individual 401k") has the "Employer Matching (Profit Sharing) Contributions" under "Individual 401(K)" and not "Roth 401(k)".

How do I tell Turbotax I want my employer profit-sharing contribution to be Roth as well?

[JulieS]

Yes, you can enter Roth 401K contributions in TurboTax. 

This is where you enter it:

1. Select Federal on the left side menu.
2. Under  Wages & Income, scroll down to Other Business Situations, expand the section.
3. Find Self-Employment Retirement Plans, select Start or Revisit to the right.
4. Answer the first and second question Yes.
5. On the screen Individual and Roth 401(k) Plans, enter your information about both plans in the appropriate boxes. You may need to scroll down because Roth 401(k) is at the bottom. 

 

[dd90]

Thanks, but this question is specifically about the employer matching (profit sharing), which as shown in your screenshot is under the "Individual" and not the "Roth" section.

I now believe there is no way to do this in Turbotax at the moment.

[AliciaP1]

Under the SECURE Act 2.0, the employer Roth 401(k) do not affect your personal taxes, which is what this screen is for.  You need to enter the employer contribution as an expense within your business expenses to get the business deduction you are allowed now.  Don't forget that employer Roth 401(k) contributions result in taxable income when distributed, even though it comes from a Roth 401(k).

To enter the employer match contribution amount in TurboTax Home & Business you can follow these steps:

1. Within your tax return under the Business tab click Continue and I'll choose what I work on
2. Click Update for Business Income and Expenses
3. Click Edit for the business the contribution is for
4. Enter the contribution amount as Other Miscellaneous Expenses under Other Common Business Expenses

@dd90 

[dd90]

Thanks.

As I mentioned in my question, I have a single-member LLC, hence a disregarded entity, and its income is passed through directly to my personal taxes.

So it does affect my personal taxes.

[AliciaP1]

What I mean is the amount is not taken on the screen you are trying to enter it on because, at the time of contribution, it is an employer (business) reportable transaction and belongs on the Schedule C, not on the personal retirement contribution page which flows through to line 16 or 20 of Form 1040 Schedule 1.

@dd90 

[dd90]

Well that's interesting.

Why is there an "employer match (profit sharing)" entry on that screen? What is that for, if not to flow through to schedule C? What should I put in that box (if anything)?

I don't have "Home & Business", I have "Deluxe". There is a "Business Expenses" screen in Deluxe. It has "Cars, trucks, and other vehicle expenses", "Assets and depreciation", "All other expenses", "Home office expenses". "All other expenses" does have "Pension Plan Contributions", which I think corresponds to what you're describing. It says "Enter the amount you contribute to your retirement plan when we ask about Individual 401(k)s, SEPs, Keoghs and SIMPLE contributions later in the program."

[dd90]

Also, putting it as a business expense on schedule C has this odd effect that it is no longer counted as profit, so my taxes go down. I mean, I don't mind, but can that be right?

Also, it affects the amount that the employer can contribute (since it's 25% of adjusted earned income), so if I can contribute X and put it in this line, it affects adjusted earned income, so I can no longer contribute X (it's too high), so I have to adjust it somehow. That also feels weird. Can that be right?

[dd90]

Under "Employer Deduction", https://www.irs.gov/pub/irs-pdf/p560.pdf says: "Sole proprietors and partners deduct contributions for themselves on line 15 of Schedule 1 (Form 1040)." So I believe I cannot deduct them on schedule C.

[dd90]

This is so complicated, I think I'll abandon the plan to use Roth 401k for the employer match portion, and just contribute to the deductible 401k for the employer match, because then Turbotax just has a spot for it.

[dmertz]

An employer contribution to your designated Roth account in your solo 401(k) gets entered nowhere in TurboTax.  It is not deductible.  You must yourself make sure that the annual additions to your solo 401(k) do not exceed the section 415(c) limit based on net-earnings from self-employment (net profit minus the deductible portion of self-employment taxes).  You cannot use TurboTax's Maximize button for the 401(k) contribution when you make the employer contribution to the designated Roth account.

You must also make sure that your solo 401(k) plan agreement has been updated to allow employer contributions to be made to the designated Roth account.

[dd90]

Thanks.

It seems likely that it's not deductible, but .. I really don't even declare it anywhere on the tax return? Seems odd, but possible I guess.

[dc20222023]

@AliciaP1 If we enter it on schedule C as a business expense, it would be deductible now. Anything else to do to pay taxes on the roth? such as - enter the employer-matching (profit-sharing) portion on schedule C as a business expense and then add it to employee roth 401k contribution (the previous screenshot)? But if we do this, Turbotax will give a warning saying roth 401k contribution can't be more than $22500. @JulieS

Thanks!

[dmertz]

401(k) contributions for the self-employed individual are not to be reported on Schedule C.  The retirement contributions reportable on Schedule C are only those made for non-owner employees.

[dc20222023]

@dmertz I just found this:

--------------------------------------------------

"Designated Roth nonelective contributions and designated Roth matching contributions. SECURE 2.0 Act section 604 permits certain nonelective contributions and matching contributions that are made after December 29, 2022, to be designated as Roth contributions. The reporting instructions that apply to designated Roth contributions (which are made in lieu of elective deferrals) do not apply to designated Roth nonelective contributions or designated Roth matching contributions. Instead, designated Roth nonelective contributions and designated Roth matching contributions must be reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the year in which those contributions are allocated to an individual’s account." https://www.irs.gov/forms-pubs/secure-20-act-changes-affecting-amounts-reported-on-the-2023-forms-w-...

-------------------------------------------------------

So for employer contribution (is it so-called backdoor roth 401k conversion) we're supposed to report it using 1099-R for the roth conversion. And before the conversion for single-member LLC or sole proprietorship we don't report the employer contribution on schedule C, we should put it on the previous screenshot along with employee contribution so that the employer portion could show up on schedule 1 line 16. So the solo 401k may get a deduction because they're on schedule 1 but when converting to roth, would have to pay taxes. I can add the 1099-R form using Turbotax home & biz desktop. Here is a video on how to fill it out. https://www.youtube.com/watch?v=KrNHyh2ura0  

https://etrade.com/ retirement team said they can provide a document which would allow us to transfer from traditional 401k to roth 401k. Hope this solves most of the problem @dd90 . We have to calculate ourselves but IRS provided formula https://www.irs.gov/retirement-plans/one-participant-401k-plans

We still have until October 2024 to open accounts, contribute and file 2023 solo 401k roth contribution, right? But the deadline to e-file to IRS seems to be march 31, 2024? https://www.tax1099.com/1099-deadline

Can we still convert tradition IRA to roth IRA for 2023 for any possible reason???