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solo401k contribution confusion

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  • solo401k contribution confusion

    My wife quit her employer in 2020. She opened a solo 401k in 2021, rollover the 401k from the custodian Guardian and contributed $19500 for her private practice income.
    Our CPA tells us now that she was supposed to issue herself a W2 in order to contribute the $19500. Otherwise she is only eligible for the profit sharing contribution portion, which is the 25% of the income. Given she made less than $50k in 2021, that's only $12500, which would make her $19.5k contribution over the limit and thus she'll need to contact Schwab to re-characterize her contribution... is that right? I have never heard about issuing a W2.
    The reason why we can't do SEP or SIMPLE IRA is because we're both contributing to our Roth IRAs as well. I would love a second opinion...


  • #2
    What was her employment status for 2021? Sole proprietor, 1099 contractor, s-corp, LLP, other? Does she have employees?

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    • #3
      Originally posted by GasFIRE View Post
      What was her employment status for 2021? Sole proprietor, 1099 contractor, s-corp, LLP, other? Does she have employees?
      She has a Sole proprietorship. No employees. She's a therapist and has her own private clients and did get a 1099 NEC from a group that helps take care of insurance patient.

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      • #4
        • I continue to be amazed at how clueless some CPAs are when it comes to employer retirements plans.
        • The CPAs here know I have great respect for the profession, but this is professional malpractice.
        • Not only was a W-2 unnecessary to make 401k employee deferrals, it is improper for a sole proprietorship to pay the sole proprietor on a W-2.
        • Not only that, but the maximum employer contribution rate applies to compensation not income. A self-employed individual's maximum employer contribution is 20% of their self-employed earned income (net earnings from self-employment) = business profit - 1/2 SE tax.
        • Additionally if the two of you have the funds and are so inclined, she has until the tax filing deadline including extensions to also make employer contributions.

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        • #5
          CPA wrote back, "I discussed with [another CPA] that you should be good to go with the $19,500 solo 401k"
          I think it's time to move on and find another CPA. 2 years ago they also screwed up our 8606 for our Backdoor roth....

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          • #6
            Originally posted by tysknight View Post
            CPA wrote back, "I discussed with [another CPA] that you should be good to go with the $19,500 solo 401k"
            I think it's time to move on and find another CPA. 2 years ago they also screwed up our 8606 for our Backdoor roth....
            "with [another CPA]" = hint: ask him which CPA that was. Might cut out the middleman.
            Last edited by Tim; 03-14-2022, 05:59 PM.

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            • #7
              Haha yeah it’s the same company. I think “another CPA” is the main guy. He was the one we met with several years ago for introduction. I threw every questions at him and he answered them well and made me felt good about our choice. But the people he used to prepare our taxes don’t seem to be up to par. I looked up my current CPA’s qualification and it looks like he’s been a financial advisor / wealth manager for 10+ years. I’m guessing taxes is not his forte. Anyways, sometimes inertia is my worst enemy and it’s time to move on.

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