Solo 401k contribution question
Solo 401k contribution question
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?
Re: Solo 401k contribution question
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.
I also assume these aren't Roth 401k contributions. If they are, I believe they must be employee contributions.
Re: Solo 401k contribution question
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.
Re: Solo 401k contribution question
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.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?
Re: Solo 401k contribution question
Ok, thanks very much.
Re: Solo 401k contribution question
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.
-
- Posts: 32
- Joined: Tue Mar 26, 2013 12:45 pm
Re: Solo 401k contribution question
PaddyMac, I believe you have this exactly backwards.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.
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.
Re: Solo 401k contribution question
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.
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.