Solo 401(k) - John R. Dundon II, Enrolled Agent
8279
post-template-default,single,single-post,postid-8279,single-format-standard,bridge-core-3.0.1,qodef-qi--no-touch,qi-addons-for-elementor-1.5.4,qode-page-transition-enabled,ajax_fade,page_not_loaded,,qode_grid_1300,footer_responsive_adv,qode-content-sidebar-responsive,qode-theme-ver-29.0,qode-theme-bridge,qode_header_in_grid,wpb-js-composer js-comp-ver-6.9.0,vc_responsive,elementor-default,elementor-kit-269
 

Solo 401(k)

Solo 401(k)

I blog today about 401(K)’s from a tax perspective solely keeping in mind that my license is as an Enrolled Agent with the US Treasury.  With that as a basis the benefits available to a self-employed individual in a solo 401(k) plan have increased. The self-employed individual can contribute to the solo 401(k) plan two ways:

  1. Through elective deferrals limited to the lesser of $16,500 or 100% of the self-employed individual’s compensation for 2011 and 2012.

  2. Through employer contributions limited to 20% of the self-employed individual’s compensation. The total of all contributions cannot exceed the lesser of 100% of the self-employed individual’s compensation or $49,000 for 2011. An additional amount of $5,500, for 2011, can be contributed if the self-employed individual has attained at least age 50 by the calendar year-end.

The self-employed individual’s compensation is defined as self-employment income after the deduction for half of the self-employment tax and the self-employed individual’s deductible contribution to the plan. Since the self-employed individual’s compensation is calculated in this manner it creates a simultaneous reduction in the maximum percentage amount the owner is able to contribute. To avoid this complicated calculation, the self-employed individual’s maximum contribution percentage can be figured by dividing the percentage amount allowed by the plan for the owner and employee by one plus the owner-employee’s contribution percentage (owner-employee % / (1 + owner-employee %)). For instance, if the self-employed individual’s plan document has a stated contribution percentage of 18% the self-employed individual’s actual maximum contribution percentage is 15.25% (18% / (1 + 18%)).

As a general rule, if the plan document states an owner-employee contribution percentage of 25%, the self-employed individual’s maximum contribution percentage is 20%. Therefore, after finding the self-employed individual’s maximum contribution percentage, using the above formula, the self-employed individual’s compensation amount is self-employment income after the deduction of half the self-employment tax.

As a side note, the self-employed individual’s deductible contribution amount is equal to the amount determined by multiplying the self-employed individual’s maximum contribution percentage by self-employed individual’s compensation (self-employment income after the deduction for half of the self-employment tax). This is the amount deducted on page 1 of Form 1040 as an adjustment to income, not as a Schedule C deduction.



Share