Resolved. First time filing taxes after opening an individual 401k in 2020

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LTCM
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Resolved. First time filing taxes after opening an individual 401k in 2020

Post by LTCM »

edit> this part is probably resolved. more questions below!

I set this (i)401k up in 2020 as business really picked up because of the pandemic. I'm wondering if I can shift some of the Roth contributions from 2020 into my 2019 taxes in order to make additional standard (non-roth) contributions in 2020 before tax deadline day on Monday.

2019 employee contribution made in 2020 (accidental):
$1000 to Roth

2020 employee contributions made in 2020:
$15,000 to Roth
$2,500 to Standard

2020 Employer contribution made in 2020:
$14,000

2021 Employer contribution made in 2021:
$19,000

Ideally I would like to reclassify the $15,000 of Roth Employee contributions as 2019 contributions (which shouldn't affect my 2019 taxes - though I assume I have to amend them?) and then contribute an additional $17,000 of standard Employee contributions into 2020 before/on Monday which would take my 2020 total to $19,500. I'd also consider moving the 2020 Roth contributions to 2019 to make additional Roth contributions in 2020 as a fall back option.

Is this possible/legal/worth doing? Does the date of the 2020 contributions matter? - they were all after the initial tax deadline but before the "extended" one. Its a self prop business.

Thanks for any help.
Last edited by LTCM on Sun May 16, 2021 10:03 pm, edited 2 times in total.
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feehater
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Re: Maximizing the tax advantages of my (i)401k contributions

Post by feehater »

There are more precise experts on this board who will hopefully see this. I think you're out of luck with 2019, and all you can do is contribute the last $1000 of 2020 employee contributions, and possibly recharacterize the 2500 as Roth. Just a reminder that for employee contributions You as the employer need to be retaining a form, signed by yourself by December 31 of each year, stating what your employee contributions will be for.that year. But it can be as simple as 'I plan to max my Roth contributions to the extent possible.'
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LTCM
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Re: Maximizing the tax advantages of my (i)401k contributions

Post by LTCM »

Thank you. I'm leaning that way too. I think the "accidental" 2019 contribution is only a 2019 contribution in the eyes of Vanguard, I think IRS considers it a 2020 contribution. So that leaves $1000 left to contribute there. Either standard or Roth.

I'm doing my taxes on H&R block online. They have a section in business income/deductions:
"Tell us how much you contributed to self-employed retirement plans"
"Qualified plan contributions"

So the individual 401k is a qualified plan contribution. What do I enter here?
$14,000 (employer only)
$16,500 (employer + standard employee contributions)
$32,000 (employer + standard AND roth employee contributions)

I thought it would be option 1, but if that's the case I can't find anywhere on HRblock to enter my $2500 employee contributions which I don't *think* I should be paying taxes on in 2020. So that leaves option 2 since I know its not option 3.

Any idea?

edit> the answer was secret option #4: $2500 (employee standard contributions). The employer contributions go in "Pension or profit-sharing plans contributions" despite the HRBlock warning "Don’t Include: Payments to your own retirement plans".
Last edited by LTCM on Sat May 15, 2021 11:26 pm, edited 1 time in total.
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LTCM
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Re: First time filing taxes after opening an individual 401k in 2020 (help requested!)

Post by LTCM »

The only individual 401k calculator I can find is this one from bankrate for 2017. I understand the employee contribution limits are out of date but that's easy to correct for. Is everything else correct (like the self employment tax deduction part?)
https://www.bankrate.com/retirement/cal ... alculator/

Image

So by this calculation I can contribute:
An additional $19,796 as an employer (33,796-14,000).
An additional $1000 as an employee (19,500-18,500)
For a total 2020 contribution of $53,296

If anyone can put my mind at ease over this I'd appreciate it!


edit> I found another calculator for 2020:
https://obliviousinvestor.com/solo-401k ... alculator/

Returns:
An employee contribution of $19,500
An employer contribution of $33,665.82
your net earnings from self-employment is defined as your business’s profit ($179,267), minus the deduction for one half of your self-employment tax ($10,937.92).

I guess I'll go with this figure of $33,665 since its more up to date and lower/safer.
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LTCM
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Re: First time filing taxes after opening an individual 401k in 2020 (help requested!)

Post by LTCM »

I've been playing around with fake numbers to see if I want to make more standard or more Roth employee contributions next year.

Is there a reason a $15,000 employer contribution reduces my taxes by approx $3,200 and an employee contribution of the same amount only reduces them by around $2900? I thought they both reduced taxes equally. What am I not understanding?

edit> employer contributions reduce self employment taxes but employee contributions don't - is that the difference?
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niceguy7376
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Re: First time filing taxes after opening an individual 401k in 2020 (help requested!)

Post by niceguy7376 »

So this is a Solo 401k for a S Corp or sole prop?
You talk about Employer and Employee and then talk about half of self employment tax

How long have you been in business?
Where is this solo 401k that offers a roth employee?
Is there any other jobs/income for you?
Are we still talking about 2020 tax return or is that something that is taken care of?
I am still trying to understand what you mean by employer contribution already for 2021
nolesrule
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Re: First time filing taxes after opening an individual 401k in 2020 (help requested!)

Post by nolesrule »

LTCM wrote: Sat May 15, 2021 11:41 pm I've been playing around with fake numbers to see if I want to make more standard or more Roth employee contributions next year.

Is there a reason a $15,000 employer contribution reduces my taxes by approx $3,200 and an employee contribution of the same amount only reduces them by around $2900? I thought they both reduced taxes equally. What am I not understanding?

edit> employer contributions reduce self employment taxes but employee contributions don't - is that the difference?
solo 401k contributions never reduce self employment taxes. Make sure you are reporting them correctly. They do not go on Schedule C but on Line 15 of Schedule 1. Some people mistakenly report contributions on Line 19 of Schedule C, but that is only for contributions made to 401k for non-owner employees of the business.
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LTCM
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Re: First time filing taxes after opening an individual 401k in 2020 (help requested!)

Post by LTCM »

niceguy7376 wrote: Sun May 16, 2021 9:26 am So this is a Solo 401k for a S Corp or sole prop?
You talk about Employer and Employee and then talk about half of self employment tax

How long have you been in business?
Where is this solo 401k that offers a roth employee?
Is there any other jobs/income for you?
Are we still talking about 2020 tax return or is that something that is taken care of?
I am still trying to understand what you mean by employer contribution already for 2021
Solo 401k for a sole prop. Been in business for 10 years technically and 5 years seriously.

Solo 401k with roth employee is with vanguard:
"Employee contributions can be either pre-tax or after tax (Roth)."

No other jobs.

2020 tax return is largely taken care of but not submitted. The same issue arises there. Employer contributions reduce tax owed by slightly more than standard employee contributions. I plan to contribute an additional $1000 employee and $4000 employer. I can see from the way hrblock displays my taxes owed with every edit that employer contributions decrease my taxes owed proportionally more than employee contributions.
Last edited by LTCM on Sun May 16, 2021 1:55 pm, edited 1 time in total.
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LTCM
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Re: First time filing taxes after opening an individual 401k in 2020 (help requested!)

Post by LTCM »

nolesrule wrote: Sun May 16, 2021 10:06 am
LTCM wrote: Sat May 15, 2021 11:41 pm I've been playing around with fake numbers to see if I want to make more standard or more Roth employee contributions next year.

Is there a reason a $15,000 employer contribution reduces my taxes by approx $3,200 and an employee contribution of the same amount only reduces them by around $2900? I thought they both reduced taxes equally. What am I not understanding?

edit> employer contributions reduce self employment taxes but employee contributions don't - is that the difference?
solo 401k contributions never reduce self employment taxes. Make sure you are reporting them correctly. They do not go on Schedule C but on Line 15 of Schedule 1. Some people mistakenly report contributions on Line 19 of Schedule C, but that is only for contributions made to 401k for non-owner employees of the business.
I think you're on to something here. I can't specifically see which line I'm entering this in because the hrblock software doesn't really display that info until it's completed and filed.

Is schedule 1 the W2 part of the form? I did try to enter some data there at one point but then got a bit lost since I don't actually have a w2.

I spoke to hrblock for about 30mins and they insisted this is where they go but I do find the results unexpected in terms of how it changes taxes owed. I have the print out of the conversation for all the good it will do me.

It seems to me that both employee contributions and Employer contributions are on the schedule c right now. I guess I have to call hrblock back. It took 3 hours to get through yesterday.

If you could give me specific lines that the 2 contributions are supposed to appear on that might help the conversation. I have employer contributions and employee contributions.

Appreciate the help. I'll try to post a couple screen shots of where they have me entering the data right now when I get back to the computer:
https://transferxl.com/08DGVnGgCsz10 (it definitely appears to be entirely schedule C)
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LTCM
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Re: First time filing taxes after opening an individual 401k in 2020 (help requested!)

Post by LTCM »

Its form 1040, Schedule 1, part II, line 15 alright:
https://www.irs.gov/pub/irs-pdf/f1040s1.pdf

Unfortunately this form is literally impossible to access via HRblock from what I can tell.

Edit> Resolved. Looks like the 401k contributions are entered in the business expenses section of HRblock but appear in the correct place later on. So it was in fact option 2 listed above (not secret option 4 at all).

So. thanks for costing me $2500 bogleheads.
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