Solo 401k & TurboTax question, "Maximize contribution to individual 401(k)"

[ezmoney]

Hi everyone, I can't seem to find an answer to a question regarding Solo 401k and Turbotax.

I have enclosed pictures of the issue. Essentially I don't understand why there is a button to "Maximize Contribution to Individual 401k" in TurboTax. Without clicking on "Max contribution" the Worksheet shows $1,372 and with clicking on "Max contribution" the Worksheet shows $6,862.

For background, I have a W-2 job which is about $300,000 in income, I already did the max elective deferrals with the W-2. My 1099 job had about $7000 net business profit. I used the Financial Buff's Spreadsheet (in the last picture) to figure out the appropriate Solo 401k contributions. I don't have any catch up contributions at my age. I don't have a Roth 401k, but I will be doing voluntary after tax contributions AKA mega back door in to Roth Solo 401k.

In the past, in TurboTax, I have NOT clicked on "Maximum Contribution to Individual 401k" but I'm not certain I'm doing it correctly.

[Craigslist]

Turbotax will do the calculations for you (depending how you file sole propietor vs. S-corp) the percentages are different, so turbotax does the work for you. looks like you can contribute up to 6862.

[ezmoney]

Well the discrepancy is as follows:

I ran the numbers on the finance buff spreadsheet and my profit sharing amount is $1372 and the mega back door amount is $4117.

Now Turbotax is suggesting I can contribute the full amount and take a deduction on my tax burden. This doesn't make sense to me.

What is Turbotax doing?

[spiritrider]

I do not have TurboTax to check, but it appears they are not applying the employee deferral limit to one-participant 401k deferrals when you check maximum contribution.

You can not make a one-participant 401k $6862 employee deferral if you have already maximized your employee deferral limit at your W-2 employer. Turbo tax does correctly calculate the maximum employer contribution, but knows nothing about employee after-tax contributions.

To my knowledge, The Finance Buff spreadsheet is the only place to correctly calculate one-participant 401k employee after-tax contributions. The Finance Buff's self-employed one-participant 401k employer and employee after-tax contributions are correct.

If you make self-employed one-participant employer contributions with self-employed earned income
income < (statutory annual addition limit / 0.8). Your maximum employee after-tax contributions = self-employed earned income - (employer contributions * 2).

This is because the employer contributions both reduce compensation and the remaining available contribution space. Any difference to the TFB results is due to rounding.

$6862 - ($1372 + $1372 = $2744) $4118

You can either contribute:

• $1372 in employer contributions + $4118 in employee after-tax contributions = $5490 in total contributions, or
• $6862 solely in employee after-tax contributions.

Pre-tax self-employed one-participant 401k contributions reduce your qualified business income (QBI). The latter is generally a better choice if you are eligible for the QBI deduction.

Although, one could question the value of a custom one-participant 401k supporting the Mega Backdoor Roth for such small contribution amounts.

[ezmoney]

Thank you so much for your input, it gave me some valuable insight!

Last year was a slow year for 1099 income. The year before I was able to put away much larger amounts, and same with this year.

Unfortunately my incomes are too large to qualify for the QBI. 😔

[spiritrider]

FYI - You probably didn't notice, but I corrected the symbol in the 4th paragraph. It should have been < (less than) and not > (greater than).