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Solo 401k contributions, front loading, quaterly example.

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  • Solo 401k contributions, front loading, quaterly example.

    Guys, hi

    I am reading on solo 401k contributions, front loading, etc.

    So far i understood that:
    1. Contributions must be based on earned self employed income during the period
    2. One is safe to front load salary deferrals (cause it does not take much income to achieve, and easier to correct in case of mistake)
    3. One should be cautious with profit sharing, it’s good idea to make them ~90% of allowed amount to be conservative and then true up in last quarter

    Could someone please double check that i calculated contributions correctly in below example?

    --------------------------------------------------------------------------------------------------------------------------------
    (single member llc, disregarded entity, no other sources of earned income, no other pension contributions or withholdings, year 2021)

    Jan-Mar: rev 0, exp 600, NI -600
    Contribution on Apr 15: deferral 0, profit sharing 0
    (no self employed income this year yet, so nothing to base contributions on, even if I have $ in bank account from previous years)

    Apr-Jun: rev 36k, exp 3k, NI 33k
    Contribution on Jul 15: deferral 19,500, profit sharing 5,419
    (Maxing out salary deferrals, contributing 90% of allowed profit sharing to be conservative, also including in income loss from previous quarter;
    Calculation for profit sharing: 32,400*(1-.9235*.153/2)*.2*.9= 5,419.98)

    Jul-Sep: rev 36k, exp 3k, NI 33k
    Contribution on Oct 15: deferral 0, profit sharing 5,520
    (similar to above calculation for profit sharing: 33,000*(1-.9235*.153/2)*.2*.9= 5,520.35)

    Oct-Dec: rev 36k, exp 3k, NI 33k
    Contribution on Jan 15: deferral 0, profit sharing 7,350
    (now that we have final numbers for the year, we are trueing up so far contributed profit sharing of 10,939 to the maximum allowed for the year of 18,289,
    calculation for profit sharing for year 98,400*(1-.9235*.153/2)*.2=18,289.65)

    Total contributions for the year 19,500 + 18,289 = 37,789

  • #2
    bump.

    Comment


    • #3
      Hey,
      I'm trying to figure this out for myself as well.

      I'm not really following how you set up your calculations though:

      32,400*(1-.9235*.153/2)*.2*.9= 5,419.98
      =
      32,400* (0.0765 *0.0765)*0.2*0.9
      =
      32,400*0.00585*0.2*0.9
      =$34.11


      (Edit)
      Shouldn't it be:
      Net earnings =(32,400 -(32,400 * 0.9235 * 0.0765))
      then,
      net earnings * 0.2 *0.9

      That seems to be what you did to get your numbers.


      Last edited by CaffeineNepenthe; 10-28-2021, 01:01 AM.

      Comment


      • #4
        Originally posted by CaffeineNepenthe View Post
        Hey,
        I'm trying to figure this out for myself as well.

        I'm not really following how you set up your calculations though:

        32,400*(1-.9235*.153/2)*.2*.9= 5,419.98
        =
        32,400* (0.0765 *0.0765)*0.2*0.9
        =
        32,400*0.00585*0.2*0.9
        =$34.11


        (Edit)
        Shouldn't it be:
        Net earnings =(32,400 -(32,400 * 0.9235 * 0.0765))
        then,
        net earnings * 0.2 *0.9

        That seems to be what you did to get your numbers.

        hi there,

        1. i wrote it assuming multiple and division is made before subtraction

        2. in my calculation q2 contribution is wrong cause it does not take into account "50% of (adjusted net income - employee contributions)" limit.
        where adjusted net income = net income * (1-.9235*.153/2)

        so in my quarterly example max allowed employer contribution on jul 15 would've been (32,400*(1-.9235*.153/2) - 19,500) * 0.5 = 5,305.50
        (and then multiplying it by 0.8 or 0.9 to be conservative)

        3. after playing with it i would recommend using solo 401k contribution worksheet or calculator and plug the numbers like if quarter was full year.

        this is the algorithm memo i wrote for myself, hope it's of use to you:

        1) make contributions after each q, q4 contribution after tax return is done
        2) to get numbers plug NI into in solo 401k calculator; use full salary deferral, and 0.8 of profit sharing; catch up pf in q4; round numbers down to nearest whole number

        example:
        q1 NI -600 / 04/06 sd 0 ; pf 0
        q2 NI 33k / 07/06 sd 19,500; pf 4,244 (plug 32,400)
        q3 NI 33k / 10/06 sd 0 ; pf 5,480 (plug 65,400, substract amounts from already contributed)
        q4 NI 33k / afterTax sd 0 ; pf 8,565 (plug 98,400, catch up pf)

        *in q1-q3 pf amounts are multiplied by 0.8

        Comment


        • #5
          Why reinvent the wheel. Just properly use Schedule C/SE, the Deduction Worksheet for Self-Employed from Publication 560 and Form 1040-ES. Then you will properly understand all the nuances and verify after year-end with tax software.

          Doing your own ad-hoc calculations can result in errors.

          Comment

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