Solo 401k contribution question

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills

Solo 401k contribution question

Postby renter » Wed Apr 03, 2013 11:07 pm

I'm making a solo 401k contribution for year 2012 involving small amount (approx. $5000). Vanguard asked me if the contribution was the employee share or the employer share. Does it make a difference how I designate it if under either scenario the total amount contributed is below the $17500 threshold?
renter
 
Posts: 211
Joined: Sat Aug 23, 2008 3:14 pm

Re: Solo 401k contribution question

Postby ossipago » Wed Apr 03, 2013 11:31 pm

I assume you aren't close to maxing the 401k limit from other employment. If you are, these contributions have to be employer contributions.

I also assume these aren't Roth 401k contributions. If they are, I believe they must be employee contributions.
ossipago
 
Posts: 101
Joined: Wed Apr 21, 2010 5:31 pm

Re: Solo 401k contribution question

Postby renter » Wed Apr 03, 2013 11:54 pm

All your assumptions are correct. So does this mean that it doesn't matter if they're classified as employer vs. employee contributions?

ossipago wrote:I assume you aren't close to maxing the 401k limit from other employment. If you are, these contributions have to be employer contributions.

I also assume these aren't Roth 401k contributions. If they are, I believe they must be employee contributions.
renter
 
Posts: 211
Joined: Sat Aug 23, 2008 3:14 pm

Re: Solo 401k contribution question

Postby ossipago » Wed Apr 03, 2013 11:58 pm

renter wrote:All your assumptions are correct. So does this mean that it doesn't matter if they're classified as employer vs. employee contributions?

Then it doesn't seem to make practical difference. I've read somewhere that businesses are supposed to decide their employer contribution rate prior to the end of the calendar year, but I'm not sure how that works; if so, then employee designations might be infinitesimally safer.
ossipago
 
Posts: 101
Joined: Wed Apr 21, 2010 5:31 pm

Re: Solo 401k contribution question

Postby renter » Thu Apr 04, 2013 10:37 am

Ok, thanks very much.
renter
 
Posts: 211
Joined: Sat Aug 23, 2008 3:14 pm

Re: Solo 401k contribution question

Postby PaddyMac » Thu Apr 04, 2013 11:20 am

It technically doesn't make a difference, and being a sole proprietor you can make contributions on either side up until your tax filing date (April or Oct with extension). But I would put it in the employER side as there is no math to prove (based on 20% of SE income etc.) in case you ever get audited.
User avatar
PaddyMac
 
Posts: 1097
Joined: Fri Jul 09, 2010 11:29 pm

Re: Solo 401k contribution question

Postby slowandsteadyone » Fri Apr 05, 2013 8:27 am

PaddyMac wrote:It technically doesn't make a difference, and being a sole proprietor you can make contributions on either side up until your tax filing date (April or Oct with extension). But I would put it in the employER side as there is no math to prove (based on 20% of SE income etc.) in case you ever get audited.


PaddyMac, I believe you have this exactly backwards.

The employEE contribution is a salary deferral contribution and is limited to the lesser of $17,000 (in 2012) or net adjusted business profit (gross profit minus expenses mins half of self employment tax)
The employER contribution is a profit sharing contribution and is limited to 20% of net adjusted business profits

In this case, the simpler one to claim (and what I would recommend) is the employEE contribution.

Please correct me if I am mistaken.
slowandsteadyone
 
Posts: 32
Joined: Tue Mar 26, 2013 1:45 pm

Re: Solo 401k contribution question

Postby mah001 » Fri Apr 05, 2013 11:58 am

The designation of the contribution could become relevant. For example:

IRS could request a timely employee deferral election, whereas the employer contribution needs no prior documentation,

Employee contributions are subject to more restrictive distribution requirements, whereas employer contributions are less restricted and can be distributed much more readily, even while still working.
mah001
 
Posts: 278
Joined: Fri Sep 28, 2012 10:30 am


Return to Personal Finance (Not Investing)

Who is online

Users browsing this forum: MossySF, toblerone, ww340 and 18 guests