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Solo 401k?

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  • Solo 401k?

    Tried to research this and feel like I am reading conflicting results on the 20% rule here. If I am currently not working and elect to get a EIN and start a solo 401k, can I in theory elective defer 100% of my first $18,500 of income directly to this plan or thereabouts after paying ss and such, and an additional 20% of my net income if I were only planning on making said amount? Or is it only 20% of total net income to get the the 18500? I am currently part of no other plan at this time. Thanks

  • #2
    From my understanding you can contribute the full 18000 as your employee contribution and then 20% of net business income as your employer contribution. or 18500 if we are talking this year.


    • #3
      That's the way I read it also, but I seem to have read other examples where people stated they could only put in 20% of net. Basically my wife is an MFM and I am a nurse but since we have 3 going on 4 kids, it works out better when I am just at home with the kids. I have a few different options to do things from home but would be happy just hitting close to that 18-20k mark and putting it all away before it gets hit with her tax bracket.


      • #4
        You get one 18.5k of "employee" contribution.  The confusion comes up when you have two jobs and thus two plans.  On top of the 18.5k you can do the "employer" 20% contribution as well.  In your case you don't have another plan so you can contribute both.


        • #5
          Almost everyone is aware of the 402g employee deferral limit. Adjusted for inflation in 2018 this is $18,500/employee across all SARSEP IRA, SIMPLE IRA, 401k and 403b plans.

          Many are aware of the 415c statutory annual addition limit. This is the sum of all employee and employer contributions. Adjusted for inflation in 2018 this is $55,000/employee for each unaffiliated employer.

          There is also a 415c annual addition limit of 100% of compensation. This is easy for a W-2 employee. Their employee contributions + employer contributions can not be > than their compensation.

          It is a little trickier for the self-employed. Since they are both employee and employer, the employer contribution reduces their compensation by that amount. This is why even though their maximum employer contribution is 25% of compensation it must be calculated as 20% of net self-employment earnings (business profit -1/2 SE tax)

          Since the employer contribution itself reduces compensation, the 415c 100% of compensation limit is applied by the following formula: maximum employer contribution = (net self-employment earnings - employee deferral) / 2.

          For examples, I will use 2017's $18K because it makes the math easier. The maximum employer contributions with the following net self-employment incomes are shown.

          $18K = * 20% = $3.6K, but ($18K - $18K = $0) / 2 = $0.

          $20K = * 20% = $4.0K, but ($20K - $18K = $2K) / 2 = $1K.

          $24K = * 20% = $4.8K, but ($24K - $18K = $6K) / 2 = $3K.

          $30K = * 20% = $6.0K and ($30K - $18K = $12K) / 2 = $6K.

          >= $30K, no restriction except by the statutory limit.

          P.S OOPS, I just realized I made a recent post without taking this into account in error. Off to find if possible and correct. I found it. It is the post titled "Best way to pay wife" if interested.


          • #6
            You are saying the employer contribution is the 6k in addition to the employee contribution of 18500 on a income of 30k? Or just 6k total?


            • #7
              Here is a great solo 401k calculator that I use periodically to get quick estimates. If you click "view report" it gives you more detail.




              • #8
                This was for last year's numbers (this tax season). The maximum 2017 contributions for self-employed earnings of $30K would be and $18K* employee deferral and $6K employer contribution for total of $24K.

                * Assuming no other employee deferrals at other qualified plans.


                • #9
                  Thanks! sorry if I made that confusing haha, don't delve into this a ton as normally just a w2 guy stuck by the system.


                  • #10

                    Here is a great solo 401k calculator that I use periodically to get quick estimates. If you click “view report” it gives you more detail.

                    Click to expand...

                    Like almost all other online calculators this will give you an incorrect result if your employee deferrals are > 60% of net self-employment earnings when making employer contributions.

                    Making a same tax year employer contribution using the results of these calculators in such circumstances will result in an excess employer contribution. Unlike excess contributions to other plans, excess contributions to qualified plans can not normally be returned.

                    Without getting into the messy details. Never make 401k employer contributions based on the results of online calculators unless you have verified the results with your tax preparation software and/or the Deduction Worksheet for Self-Employed from publication 560. Preferably both.



                    • #11
                      Pub 560 always confuses me, this is my second year contributing to s401k but darn it if i'm not confused by this worksheet and calculation again.


                      • #12
                        If you must use a one-participant 401k calculator. Use this one from the Oblivious Investor Solo 401(k) Contribution Calculator

                        Disclaimer: It is still an internet calculator, but at least it handles the two most common exception conditions that other calculators do not:

                        • When your ((net self-employment earnings - employee deferral) / 2) < (20% of net self-employment earnings). Looking at it an easier way. If your employee deferral > 60% of your net self-employment earnings when making employer contributions.

                        • (Total W-2 Box 1 Wages + Box 12 Codes DEFGH + (0.9235 * business profit)) > Social Security maximum wage base. 2017 = $127,200.

                        I still strongly recommend a second data point. Your tax software or the Deduction Worksheet for Self-Employed from publication 560.