Solo 401K (Keogh) Over Contribution

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Topic Author
NewYork140
Posts: 5
Joined: Tue Apr 27, 2021 11:07 pm

Solo 401K (Keogh) Over Contribution

Post by NewYork140 »

So here we go....

I have a good old American W2 job, and a successful consulting company.

In 2019, and 2020, I maxed out my 401K with my W2 employer. I also went above and beyond my calling, and invested the max, as the employee and employer, of $56,000 to my solo 401K (Keogh) for 2019, and $57000 for 2020. My consulting company income supported this just fine.

I now realize, I essentially over-invested by $19,000 for 2019, and $19500 for 2020.

I called Fidelity and they were really not very helpful or clear, based on my experience.

I can blame my accountant all day for this, but I think it's best for me for try to get this resolved quickly without risking any future issues. He was under the impression the W2 was a different retirement plan, so this was perfectly normal.

As a note, I did not file my 2020 taxes yet.
The 2019 taxes are long and gone, with the final $19,000 for 2019 invested in Feb of 2020.

Can someone please guide me step by step here? If someone recommends a financial planner who can walk me through this, I would be happy for some goodwill! Thank you friends :-)
nolesrule
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Joined: Thu Feb 26, 2015 10:59 am

Re: Solo 401K (Keogh) Over Contribution

Post by nolesrule »

would the income have supported the full amount coming from employer contributions or do you truly have excess contributions?
Topic Author
NewYork140
Posts: 5
Joined: Tue Apr 27, 2021 11:07 pm

Re: Solo 401K (Keogh) Over Contribution

Post by NewYork140 »

I’m not quite sure what you mean by that…

I maxed out the 401K ($19,500) with my w2 employer, and then maxed out the Solo 401K plan for my own company to the tune of 57K for 2020 as the employer and employee.

Does that help clarify?

The income for my company was quite high.
nolesrule
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Re: Solo 401K (Keogh) Over Contribution

Post by nolesrule »

Was the income for your company high enough to support the entire $57k contribution as an employer contribution? And are you a Schedule C SP or an S-Corp?
SuzBanyan
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Joined: Thu Jun 02, 2016 11:20 am

Re: Solo 401K (Keogh) Over Contribution

Post by SuzBanyan »

Because the employer contribution is 20% of net self employment earning (after subtracting half of self employment taxes), you probably need almost $300,000 in 1099 earnings to support a $57,000 contribution as employer. You can put in your numbers from both you W-2 job and self-employment here:
https://obliviousinvestor.com/solo-401k ... alculator/

When did you make your 2020 contribution? If your side business income is sufficient, the plan administrator (you) may be able to assign any contributions made in 2021 to the 2021 tax year employer contribution.
Topic Author
NewYork140
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Joined: Tue Apr 27, 2021 11:07 pm

Re: Solo 401K (Keogh) Over Contribution

Post by NewYork140 »

Hi All,

Yes the income was totally sufficient.

I made the contributions throughout the year in 2020. I thought about having Fidelity move them for 2021- but the deposits weren’t made at any point this year so they aren’t willing to do that.

Any ideas or directions?
nolesrule
Posts: 1902
Joined: Thu Feb 26, 2015 10:59 am

Re: Solo 401K (Keogh) Over Contribution

Post by nolesrule »

NewYork140 wrote: Tue May 04, 2021 8:35 pm Hi All,

Yes the income was totally sufficient.

I made the contributions throughout the year in 2020. I thought about having Fidelity move them for 2021- but the deposits weren’t made at any point this year so they aren’t willing to do that.

Any ideas or directions?
Making employee contributions at your W-2 401k doesn't reduce the $57k limit for your self employment.

Take a look at the worksheet for calculating the max contribution to a SE 401k.
https://www.irs.gov/pub/irs-pdf/p560.pd ... nk10009063

You'll note it doesn't subtract out employee contributions made to another plan. However, you cannot make employee contributions to your plan, so you just need to consider them employer contributions if you have the income to support them as 100% employer contributions. That amount of income after subtracting SE taxes is 5x the total contributions limit.

If the income was sufficient that all the contributions could be made as employer contributions (Net income - 1/2 SE taxes >= $285k for 2020 or $280k for 2019), I don't see the problem. Fidelity's solo 401k doesn't track employee vs. employer contributions.
Topic Author
NewYork140
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Joined: Tue Apr 27, 2021 11:07 pm

Re: Solo 401K (Keogh) Over Contribution

Post by NewYork140 »

Ah!

So this is the conflicting information I keep getting.

Some folks are telling me if I contributed the max via my W2 job with a different employer; I am not able to max out the Solo 401K by the full amount.

I thought that to be the case; otherwise someone could theoretically open up multiple companies and keep contributing the max to separate solo accounts?
nolesrule
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Re: Solo 401K (Keogh) Over Contribution

Post by nolesrule »

NewYork140 wrote: Wed May 05, 2021 9:40 am I thought that to be the case; otherwise someone could theoretically open up multiple companies and keep contributing the max to separate solo accounts?
Nope. Having common ownership of 80%+ in multiple business is considered a Controlled group and they would share a 401k and have a single max contribution limit.
Topic Author
NewYork140
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Re: Solo 401K (Keogh) Over Contribution

Post by NewYork140 »

I'm not sure if that applies here...and forgive my ignorance here.

I own company X- where I did a max contribution of $57K

I worked for company Y, where I did a max employee contribution of $19,500

Are we saying that is allowed?
SuzBanyan
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Re: Solo 401K (Keogh) Over Contribution

Post by SuzBanyan »

NewYork140 wrote: Wed May 05, 2021 1:54 pm I'm not sure if that applies here...and forgive my ignorance here.

I own company X- where I did a max contribution of $57K

I worked for company Y, where I did a max employee contribution of $19,500

Are we saying that is allowed?
Yes, as long as you don’t also own Company Y.
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neurosphere
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Re: Solo 401K (Keogh) Over Contribution

Post by neurosphere »

SuzBanyan wrote: Wed May 05, 2021 2:09 pm
NewYork140 wrote: Wed May 05, 2021 1:54 pm I'm not sure if that applies here...and forgive my ignorance here.

I own company X- where I did a max contribution of $57K

I worked for company Y, where I did a max employee contribution of $19,500

Are we saying that is allowed?
Yes, as long as you don’t also own Company Y.
Yep. The key piece that people have already mentioned, but I'll restate for clarity, is that you can only make $19,500 in TOTAL across all employers for the employEE portion of 401k deferrals. However with your solo 401k you are both the employer and the employee. And if the profits otherwise allow you, you can simply designate $57,000 in contributions as the employER profit sharing contribution, with none for the employee deferral. It all works out the same, taxwise.

An example. Let's say I only have my one self-employment job and I make $200,000 in profits, and want to put $10,000 into the 401k. It doesn't matter whether I designate that amount as an employee deferral, an employer profit sharing contribution, or some of each.

In your specific case, you have already maxed out the employee part (one limit across all jobs) but the $57,000 limit is PER (unrelated) job and can be filled exclusively with employer contributions.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
nolesrule
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Re: Solo 401K (Keogh) Over Contribution

Post by nolesrule »

And just to reiterate one more time... in order to be able to make the entire $57k as an employER contribution your Self Employed net income (from Schedule C) - 1/2 SE taxes would need to be $285k or more, because the employer contribution for a sole proprietor is limited to 20% of profits.
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