Solo 401k contribution question

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Topic Author
renter
Posts: 561
Joined: Sat Aug 23, 2008 2:14 pm

Solo 401k contribution question

Post by renter »

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?
ossipago
Posts: 182
Joined: Wed Apr 21, 2010 4:31 pm

Re: Solo 401k contribution question

Post by ossipago »

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.
Topic Author
renter
Posts: 561
Joined: Sat Aug 23, 2008 2:14 pm

Re: Solo 401k contribution question

Post by renter »

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.
ossipago
Posts: 182
Joined: Wed Apr 21, 2010 4:31 pm

Re: Solo 401k contribution question

Post by ossipago »

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.
Topic Author
renter
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Joined: Sat Aug 23, 2008 2:14 pm

Re: Solo 401k contribution question

Post by renter »

Ok, thanks very much.
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PaddyMac
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Re: Solo 401k contribution question

Post by PaddyMac »

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.
slowandsteadyone
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Joined: Tue Mar 26, 2013 12:45 pm

Re: Solo 401k contribution question

Post by slowandsteadyone »

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.
mah001
Posts: 302
Joined: Fri Sep 28, 2012 9:30 am

Re: Solo 401k contribution question

Post by mah001 »

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.
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