Changing Jobs: solo 401k contribution limit

[dr.j]

I'm sooooo glad I found this forum! Thank you in advance for any help you guys can give. Very timely indeed!

Just this month, I have changed jobs from an employee (W2) to an independent contractor (1099).

With my former employer (Company X), the following was contributed to my 2015 401k:

Employee (tax-deferred) contribution: $12,838.56

EmployER Safe Harbor contribution: $5,646.70

As an independent contractor, I have elected to open a individual (solo) 401k for my small business (single employee - myself). I chose the solo 401k route because I can rollover my SEP-IRA into the solo 401k... which will allow me to make backdoor RothIRA contributions in the future.

Question:

I understand that my employEE (tax-deferred) contribution limit is maxed at $17,500 $18,000 across ALL plans. However, what is my solo 401k employER contribution limit for 2015? Is it $40,500 $35,500? Does the Company X Safe Harbor contribution count toward my solo 401k employER contribution?

(corrected errors above)

Thanks everybody!

[Lou S.]

Assuming you are under age 50 and not catchup eligible and that you had no ownership, controlled group issues or affiliated service with company X then your annual additions 415© limit for your solo-K would be $53,000 for 2015 - assuming you have the income to support such an addition and presumably to make it tax deductible. That is company X plan has no impact on your solo-K, other than to reduce the amount of elective deferral 401(k) that you can make you your solo-K for 2015.

If your income is from your solo-K business is $212,000+ you can simply make an employer contribution of up to $53,000 and be done.

If you are self employed and/or your income is below that number the math can get a bit trickier. Also if you are over age 50, the additional catchup limit of $6,000 for 2015 can come into play.

[Tom Poje]

the only caution is to be careful how the plan document defines 'limitation year'.

if it is defined as the plan year (and the initial year runs 7/1-12/31) then the contribution limit is cut in half due to a short plan year.

way back in 1996 at ASPPA Conference (Q and A #86) the IRS indicated even though the company might not have been in existence there is still no short limitation year unless the plan document indicates otherwise.

[dr.j]

If you are self employed and/or your income is below that number the math can get a bit trickier. Also if you are over age 50, the additional catchup limit of $6,000 for 2015 can come into play.

For the remaining 6 months of 2015, I am anticipating an additional $138k in 1099 income. What is my calculation for the employer contribution for 2015?

I am under the age of 50.

I GREATLY appreciate your help!

[Lou S.]

25% of your "pensionable income" plus the remaining 401(k) contribution limit.

"pensionable income" is going to be be Sch Net minus 1/2 self employment taxes minus employer contribution; can't recall if there is another adjustment. As an approximation I'd guess you could put in about $26K er contribution + $4.6K 401(k) contribution.

[dr.j]

the only caution is to be careful how the plan document defines 'limitation year'.

if it is defined as the plan year (and the initial year runs 7/1-12/31) then the contribution limit is cut in half due to a short plan year.

way back in 1996 at ASPPA Conference (Q and A #86) the IRS indicated even though the company might not have been in existence there is still no short limitation year unless the plan document indicates otherwise.

I opened my solo 401k with Fidelity, and I just spoke to their representative. There doesn't appear to be any limitation even though the "effective date" of my plan is 6/2015.

[dr.j]

25% of your "pensionable income" plus the remaining 401(k) contribution limit.

"pensionable income" is going to be be Sch Net minus 1/2 self employment taxes minus employer contribution; can't recall if there is another adjustment. As an approximation I'd guess you could put in about $26K er contribution + $4.6K 401(k) contribution.

I found a worksheet online from Fidelity that walked me through the calculation.

The elective deferral limit for 2015 is $18,000. I have already contributed $12,838.56. That leaves me $5,161.44 left to contribute for 2015.

For my employer contribution, I calculated $25,760.

Pretty close to your numbers, although I'm calculating a higher elective deferral.

THANKS!!

[Lou S.]

Yeah. Stupid me. I used your $17,500 in the OP and not the actual 2015 limit of $18,000. And if you have expenses on your Sch C, that will reduce your income further, but you've got a pretty good estimate if you are shooting for the max.

[Mike Preston]

It looks like you will have W-2 income in excess of the SSWB (social security wage base), which is $118,500 for 2015. Accordingly, with 1099 income of $138,000 the "reduction" to that $138,000 for the "Self employment tax adjustment" will only be $1,848 rather than the $9,193 used to determine a max contribution of $25,760 [Formula of $138,000 - $9,193 = $128,807 * .2 = $25,761]. Substituting $1,848 for $9,193 results in a max contribution of $27,230.

To get the right number, have your accountant fill out a Schedule SE (Form 1040) and use that number rather than my $1,848.

mike

[dr.j]

To get the right number, have your accountant fill out a Schedule SE (Form 1040) and use that number rather than my $1,848.

mike

Wise advice.

I plan to contribute up to approximately $25k and then wait until my taxes are completed. At that point, I'll know how much additional profit sharing contribution I can make.

I've noticed that there are several calculations for determining the profit sharing contribution limit. Do you have any IRS (or any other) references that will help me understand the "why" and "how"? For example, in your above calculation, why is the adjusted net business profit multiplied by 0.2?

[mbozek]

The net profit is multiplied by .2 because 20% is max deduction for employer contributions to a 401k plan while the employee contributions are 100% deductible. Its complicated. to see how the IRS calculates the deduction go to IRS pub 560 P 25-26 for the calculation worksheet. Pub is found at irs.gov

If you are self employed your income for 401k contributions is your net income from self employment which is determined on Schedule C of the 1040. Sked C income is your income from fees after taking all business expenses.

[Calavera]

I suggest to postpone your profit sharing contribution until next year. I have seen too many clients where the expected earnings of $X become 50% of $X by the end of the year, and could not support a contribution that was already made.

[dr.j]

I suggest to postpone your profit sharing contribution until next year. I have seen too many clients where the expected earnings of $X become 50% of $X by the end of the year, and could not support a contribution that was already made.

That's a good point. In my profession, my income is virtually certain unless I suddenly become disabled.

[Mike Preston]

And if you do become disabled, do you think you would enjoy fixing an overcontribution problem (think excise taxes, etc.) when you could have avoided it entirely by waiting a few months to make the contribution?

[Mike Preston]

I agree with mbozek that "It's complicated." Some of the rest of his description is rather loose. I agree to see the IRS worksheet for details.

[Bird]

mmm, since Mike rekindled this thread all of a sudden I remember a protracted "discussion" about the IRS worksheet several years back. I think there was some kind of a shortcut or flaw in it that gave an incorrect result in a particular situation...can't remember the details other than that I was right . It's probably fine for someone with no employees.

FWIW, the maximum deduction is 25%, but that is on compensation after taking the contribution into account, so it boils down to 20% before the contribution.

[mbozek]

So the IRS worksheet on how to calculate the max deduction to a DC plan by a self employer person is incorrect even though been in effect for over 50 years? Please explain the error. FYI- the calculation in pub 560 can only be used by a self employed person, not the 100% owner of an S corp where deduction is claimed by corp which reduces w-2 comp paid to owner. Deduction for contributions to 401k plan accounts of w-2 employees of a self employed person is made on Schedule C as a deduction to self employment income, not the pub 560 calculation.

The compensation of a self employed person is reduced by 1/2 of the seca tax before the contribution deduction is calculated. Pub 560 has a table that gives the max deduction percent for the percent contributed to the owners 401k contributions. DB contributions are calculated differently determine the max deductible contribution.

My explanation was simplified because the nuances are all described in detail in pub 560 or in a text on pension plans.

[Bird]

So the IRS worksheet on how to calculate the max deduction to a DC plan by a self employer person is incorrect even though been in effect for over 50 years?

That's correct. It doesn't matter in this case and I'm not revisiting it. It might have had something to do with the way the contributions for employees was calculated.

No problem with the simplified explanation.