Calculate Vanguard solo 401K limit

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JD58
Posts: 10
Joined: Sat Aug 05, 2017 6:08 pm

Calculate Vanguard solo 401K limit

Post by JD58 » Fri Nov 08, 2019 12:58 pm

I was finally retired by mega corp this past June after 6 months of "retired" severance pay and medical coverage. During this time I was not eligible to put money into the mega corp's 401K. I will get a w-2 though for the 6 months of severance pay. All good things as the extra 18 months total allowed a good time of planning and removing all debt but the house thanks to many discussions on this site. But in August another company asked me to do some consulting. So I started a sole proprietor business and a Vanguard solo 401k under the new business. I do not need this money now and like putting it away to invest.

But I am having a hard time calculating how much of the business net income I can defer as both employer and employee into the new 401k. Expect more consulting in December (@$5000 more). But I am just looking for quick help understanding the calculation method.

Net profit for the 2 months of consulting is $17500.
Deduct 1/2 SSA of $1233.22
Net is $16,266.78

My understanding is that as employer can do up to 25% of this or $4066.70.

That leaves @ $12,200. Since employee is able to put in $25,000 for the year (includes the catch up dollars), does that mean I could put all $12,200 into the new 401k?

Am I missing something obvious with this?

Thanks for any insight.

Spirit Rider
Posts: 11692
Joined: Fri Mar 02, 2007 2:39 pm

Re: Calculate Vanguard solo 401K limit

Post by Spirit Rider » Fri Nov 08, 2019 3:31 pm

There are some nuances in your circumstances:
  • Your one-participant 401k contributions are based in your self-employed earned income (business profit - 1/2 SE tax). However, your SE tax calculation will reflect any W-2 SS wages you had at your prior employer. Your 1/2 SE tax calculation may be incorrect.
  • The employee deferral limit ($19K + $5K catch-up if >= age 50) is across all 401k, 403b, SARSEP and SIMPLE IRA plans. The amount you can contribute as an employee deferral to your one-participant 401k = $19K or $25K - W-2 employer (employee deferral + catch-up).
  • While the maximum employer contribution is 25% of compensation, a sole proprietor calculates it as 20% of their self-employed earned income. This is because the employer contribution itself reduces their compensation.
  • The annual addition limit (2019 = $56K) or 100% of compensation is separate for each unaffiliated employer. At lower levels of self-employed earned income the maximum employer contribution can be limited to the lessor of:
    • $56K - 403b (employee + employer contributions) - one-participant 401k employee deferrals.
    • (Self-employed earned income - employee deferrals) / 2.

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