Contribution deadlines for qualified plans / Mike Piper

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Fri Jan 22, 2016 7:17 pm

I am self-employed with no employees. Just myself.

A few years ago i established a Simple IRA and this is what I found at irs.gov.

For self-employed persons with no common-law employees, the latest date for depositing salary reduction contributions for a calendar year is 30 days after the end of the year, or January 30th.

In December 2015 I created for 2015 a Solo 401(k) (with both traditional and Roth options) with Vanguard.

The Vanguard representative wrote this:

Employer Contributions to a qualified retirement plan must be made by the
employer's tax filing deadline, including extensions. A sole
proprietorship or partnership's deadline for depositing salary deferrals
into the Individual 401k is generally the personal tax filing deadline,
April 15( or October 15 if an extension was filed.)

I'm looking for assurance that all the above is true. I'm trying to decide how much to fund the Simple IRA, the traditional 401(k), and the Roth 401(k). And, if the above is true, I need to make the decision on the Simple IRA portion and fund it by January 30th (or, in the case of this year, February 1st since January 30th is a Saturday).

Thanks

Vinny

Spirit Rider
Posts: 10364
Joined: Fri Mar 02, 2007 2:39 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by Spirit Rider » Fri Jan 22, 2016 9:18 pm

The Vanguard rep is correct on the contribution deadlines for a solo 401k. However, there are some additional requirements.

You can not make contributions based on income received before the effective date of the plan. Hopefully, you retroactively (which is allowed) made the effective date 01/01/15 on your adoption agreement.

The employee salary deferral election must have been completed in writing by 12/31/15. It is not as if the election form must be postmarked by 12/31, in fact you do not send it to the IRS at all, it is simply a document in your records than has a date on or before :wink: :wink: 12/31/2015.

Note: You can not have both a SIMPLE IRA and a Solo 401k at the same time. Luckily, the termination requirements are pretty easy for a sole proprietor. You would have had to notify yourself by 11/02/2014 (which if course you did and have this also :wink: :wink: documented in your records). However, a SIMPLE IRA plan must be for the entire plan year. If you already made any contributions for the 2015 tax year, you can not now fund the solo 401k.

Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Fri Dec 16, 2016 10:04 pm

Thank you for all the prior useful information on the Solo 401(k).

I am hoping that following is a simple question to answer.

My Solo 401(k) self-employment income (after deducting the 1/2 self-employment deduction) will be about $23,000 for 2016. The computation says that I could do a profit sharing contribution of about $4,600. I am over 50 so I could do an elective deferral of up to $24,000 (but, of course, limited to $23,000 in this case).

I desire to make as much of the contribution to a Roth 401(k) and as little as possible (none would be best!) to the traditional 401(k). And, I have learned that the profit sharing contribution cannot be to a Roth.

It seems that I have these options?

a. $18,400 salary deferral and $4,600 profit sharing.
b. $23,000 salary deferral with no profit sharing
c. Something in between a. and b.

Obviously, option b. is my choice. Just wanting to make sure I can use my salary deferral contribution to absorb, in my case, all the total contribution allowed with there being no requirement to do a profit sharing contribution.

Thanks

Vinny

Spirit Rider
Posts: 10364
Joined: Fri Mar 02, 2007 2:39 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by Spirit Rider » Sat Dec 17, 2016 1:52 am

a. Would actually be $18,400 salary deferral and $2300 profit sharing.

This is because your total salary deferral + profit sharing can not exceed your compensation. However, the profit sharing itself is an "employer" contribution and reduces your compensation.

Therefore, the maximum employer contribution is; (net self-employment income (net business profit - 1/2 SE tax) - employee salary deferral) / 2.

b. $23,000 salary deferral and no profit sharing is definitely the right way to go. Just make sure you do a written salary deferral election (100℅ of compensation) before 12/31.

One question. Is this moonlighting income or your only taxable compensation? If it is your only taxable compensation, you can use the same income to make an IRA contribution. This is because the Roth 401k contribution does not reduce your taxable compensation.

Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Sun Dec 18, 2016 1:58 pm

Mike,

Thanks again for your usual quick and extremely illuminating and informative response.

This $23,000 is my "moonlighting" income and I am also a 3/4's full-time employee for a non-profit so therefore have employee income.

I am planning to also do a $6,500 Roth IRA contributions, which I assume the above permits. My 2016 MAGI will be well under the 2016 Roth IRA limits.

Vinny

Spirit Rider
Posts: 10364
Joined: Fri Mar 02, 2007 2:39 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by Spirit Rider » Sun Dec 18, 2016 4:34 pm

Yes, you can still make the IRA contribution.

The reason I brought it up, was if you only had net self-employment income of $23,000. If you made a $23,000 traditional 401k (pre-tax) employee deferral, that would reduce your taxable compensation to $0 and you would not have had any left to make an IRA contribution. However, if you made a $23,000 Roth 401k (post-tax) employee deferral, that does not reduce your taxable compensation and you would still have $23,000 to make an IRA contribution.

Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Sun Apr 02, 2017 1:53 pm

I am now working on my tax returns, which includes determining what contributions I will make for my solo 401(k). I think I FINALLY understand it all. Am I?

To review, for 2016 I was 65, therefore maximum contributions would be $24,000. I desire to make as much as possible to be a Roth and minimal or none to a traditional. My net business profit before 401(k) contributions and self-employment taxes was $23,932.

You provided me with this formula: "Therefore, the maximum employer contribution is; (net self-employment income (net business profit - 1/2 SE tax) - employee salary deferral) / 2."

Using both your formula and Vanguard ( https://personal.vanguard.com/us/SbsCal ... &NavStep=1) gives me the same result: $22,441.

However, using Fidelity ( https://scs.fidelity.com/products/mobil ... bile.shtml ) gives me $26,689, which is greater by $4,448, the allowable profit sharing contribution. Seems as though they may be double counting it?

I did my best go get through this:

https://www.irs.gov/publications/p560/ch05.html

It seemed to reaffirm that $22,441 is the correct maximum and that if I do the entire amount as an $22,441 employee salary deferral there would then be nothing left for an employer profit sharing contribution.

Am I FINALLY understanding all of this? I can make a 100% Roth contribution of $22,441, which then leaves $0 available for an employer profit sharing contribution?

As usual, thanks for your help.

Vinny

Spirit Rider
Posts: 10364
Joined: Fri Mar 02, 2007 2:39 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by Spirit Rider » Sun Apr 02, 2017 3:21 pm

Yes, with no other compensation subject to FICA or SE tax, a net business profit of $23,932 will result in a net self-employment income = $22,241. With age >= 50, you can contribute this all to the employee deferral. This consumes all of your net-self-employment income, so there is nothing remaining for employer contributions.

However, because all of your solo 401k contributions are to a Roth 401k account, that does not reduce your taxable compensation. You can also take the self-employed health insurance deduction and make a $6,500 IRA contribution for yourself and/or a spousal IRA contribution if you are married.

As crazy as it seems, you can actually triple-dip on the same income. Of course, you would have to use other funds to be able to contribute your entire compensation as a Roth solo 401k, pay income taxes, pay SE taxes, pay health insurance premiums and make $6,500 - $13,000 in IRA contributions. Never-mind living expenses.

Fidelity's calculator is in fact incorrect.

Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Sun Apr 02, 2017 6:22 pm

Thanks for the usual extremely quick and on-point response.

I am also an employee elsewhere but that income along with the net business profit income does not put me over any FICA or SE limits.

It is just me and I do plan to also make a $6,500 Roth IRA contribution.

And, I am able to fund all of it as this is part of my strategy to get as much as possible retirement money in the form of a Roth.

Thanks again!

Vinny

Spirit Rider
Posts: 10364
Joined: Fri Mar 02, 2007 2:39 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by Spirit Rider » Sun Apr 02, 2017 6:33 pm

An FYI if you didn't already know and did this on purpose. if instead of a Roth 401k deferral, you had made a traditional 401k deferral, you would not have been able to make an IRA contribution.

Do you pay health insurance premiums? They are deductible.

Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Mon Apr 10, 2017 1:15 pm

Just now seeing your last response.

Yes, I did pay health insurance premiums.

Vinny

Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Sun Mar 03, 2019 1:43 pm

Staying on this set of messages in hopes it attracted your attention, Mike. And, the final question IS related to qualified plans.

1) For purposes of computing the 20% "Qualified Business Income Deduction" one must first deduct both the "1/2 of SE tax" AND "self-employed health insurance deduction" from it to arrive at "Adjusted" Business Income?

2) Has this Qualified Business Income Deduction affected the amounts eligible for an individual 401(k)?

For years and years Vanguard had this: https://personal.vanguard.com/us/SbsCal ... Controller, which did all the calculations, and which allowed you to go farther to see how the calculations were made.

Now that link brings you to NO calculator and this message: "*Self-employed individuals must make a special computation to figure the maximum contribution amount. Use the rate table or worksheets in Chapter 5 of, IRS Publication 560 Retirement Plans for Small Business, or see a tax advisor."

Fidelity still has a calculator here (but with no explanation for its calculations): https://www.fidelity.com/retirement-ira ... k/overview. And, the amount calculated is lower than it was when I ran it in 2018.

All, of the above is leading me to believe that the Qualified Business Income Deduction IS affecting the maximum contribution for an individual 401(k).

As always, thanks for any light you can shed on these questions.

Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Sun Mar 03, 2019 1:55 pm

I just reviewed the calculations in the Publication 560 for 2018 returns. I saw NO reference to the Qualified Business Income Deduction. And, when I looked at the worksheet I've been using for several years to compute the maximum 401(k) the amount agrees with what the Fidelity web site had calculated.

Therefore, that leaves me with....

1) The Qualified Business Income Deduction does NOT affect the individual 401(k) calculation.
2) If #1 true, puzzled why Vanguard dropped their 401(k) calculator.

Thanks

Vinny

User avatar
tfb
Posts: 8046
Joined: Mon Feb 19, 2007 5:46 pm
Contact:

Re: Contribution deadlines for qualified plans / Mike Piper

Post by tfb » Sun Mar 03, 2019 2:22 pm

vnatale wrote:
Sun Mar 03, 2019 1:43 pm
All, of the above is leading me to believe that the Qualified Business Income Deduction IS affecting the maximum contribution for an individual 401(k).
No, the other way around.
Harry Sit, taking a break from the forums.

Spirit Rider
Posts: 10364
Joined: Fri Mar 02, 2007 2:39 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by Spirit Rider » Sun Mar 03, 2019 2:37 pm

vnatale wrote:
Sun Mar 03, 2019 1:43 pm
1) For purposes of computing the 20% "Qualified Business Income Deduction" one must first deduct both the "1/2 of SE tax" AND "self-employed health insurance deduction" from it to arrive at "Adjusted" Business Income?
You must deduct Form 1040 Schedule 1; Line; 27 (1/2 SE tax), Line 28 (deductible retirement plan contributions) and Line 29 (self-employed health insurance deduction) from Line 12 to calculate QBI.
2) Has this Qualified Business Income Deduction affected the amounts eligible for an individual 401(k)?
Deductible retirement plan contributions reduce QBI, but QBI does not affect retirement plan contributions.
For years and years Vanguard had this: https://personal.vanguard.com/us/SbsCal ... Controller, which did all the calculations, and which allowed you to go farther to see how the calculations were made.

Now that link brings you to NO calculator and this message: "*Self-employed individuals must make a special computation to figure the maximum contribution amount. Use the rate table or worksheets in Chapter 5 of, IRS Publication 560 Retirement Plans for Small Business, or see a tax advisor."
Probably, because only using online calculators may cause you to make incorrect contributions and they probably don't want the liability It is too bad, because I think they were the only ones to do basic SIMPLE IRA calculations correctly.
Fidelity still has a calculator here (but with no explanation for its calculations): https://www.fidelity.com/retirement-ira ... k/overview. And, the amount calculated is lower than it was when I ran it in 2018.
I have no idea why that would be.
All, of the above is leading me to believe that the Qualified Business Income Deduction IS affecting the maximum contribution for an individual 401(k).
That is not correct. Maybe when it is all set and done, your total deductions are less than you would think. However, that is because the deductions to QBI reduce the QBI deduction, not because the QBI deduction has any affect on retirement plan contributions.

Shortcuts for determining maximum retirement plan contributions should be avoided. Online calculators should only be used as an aid, they may not have all necessary information. There is no substitute for (Schedule C, Schedule SE and the Deduction Worksheet for Self-Employed in Pub 560) and/or tax software. Personally, I am not happy until both agree.

Case in point, I made an error going from memory on your 2016 return. I forgot that catch-up contributions are not subject to either the statutory or 100% of compensation annual addition limits. So while your employee elective contributions + employer contributions must be <= 100% of compensation. The catch-up contribution may be on top of compensation

Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Sun Mar 03, 2019 3:06 pm

Mike,

Thanks again for the usual swift, comprehensive response which always teaches me something I need to know!

Vinny

Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Sat Apr 13, 2019 7:14 pm

Thanks to all your assistance through the years I think I finally understand.

Here is what I plan to go with for my solo 401(k) contribution (per publication 560 worksheet)

Schedule C, net profit - $24,095

Deduction for self-employment tax (Schedule 1 (Form 1040) line 27) -$1,702

Net Profit reduced by half self-employment tax - $22,393

Contribution Rate - 25%

Allowed Contribution and deduction - $4,479

Being over 55, I'm allowed the catch-up of $6,000 plus the standard $18,000 for an up to maximum $24,000.

Therefore, I could make a $22,393 Roth contribution, which would all be considered an employee ROTH deferral with NO employer deductible contribution?

If that is right I then go on to the QBI computation.

Above you stated: "You must deduct Form 1040 Schedule 1; Line; 27 (1/2 SE tax), Line 28 (deductible retirement plan contributions) and Line 29 (self-employed health insurance deduction) from Line 12 to calculate QBI."

I went through the entire IRS Publication 535 for information on QBI as it seemed to have the most information on QBI. But the detail was rather sparse. On page 51 it states, "It also includes other deductions attributable to the trade or business including, but not limited to, deductible tax on self-employment income, self-employed health insurance, and contributions to qualified retirement plans." Although it seems to be saying exactly the same as what you wrote, It does not seem as specific or as clear as how you wrote it.

If I correct in assuming that I am making NO employer contributions to a qualified retirement plan that then reduces business income then I'd see this as being my Qualified Business Income:

a. Income - $24,095
b. Deductible tax on self-employment income - $1,702
c. Self-employed health insurance - $3,520
d. Contributions to qualified retirement plans - $0 (ZERO!)
e. Qualified business income - $18,873

I have no income limitations therefore my deduction would be 20% of $18,873 or $3,775?

Have you found an IRS source that is more definitive or specific than what I have quoted above from Publication 535?

As usual, thanks for all your assistance.

Spirit Rider
Posts: 10364
Joined: Fri Mar 02, 2007 2:39 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by Spirit Rider » Sat Apr 13, 2019 9:42 pm

That appears to be correct, but I don't understand why you don't just use tax software, especially in the first year of the QBI to be sure. There are no IRS worksheets to explicitly calculate QBI and the deduction.

Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Sun Apr 14, 2019 8:22 am

I use H&R Block tax software. And, last time I used it (March 3rd) the section on QBI was not yet fully functional. I had do to a lot of overrides. After I did do an update yesterday, it now looks fully functional and agreed with my computations as I presented to you.

My main question to you was would my entire 401(k) contribution be considered an employee deferral with NONE of it being considered an employer contribution (which if considered an employer contribution would then reduce my QBI)?

Thanks

Vinny

Spirit Rider
Posts: 10364
Joined: Fri Mar 02, 2007 2:39 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by Spirit Rider » Sun Apr 14, 2019 11:06 am

You are the one who ultimately determines what are employee elective contributions and catch-up contributions and what are employer contributions. You certainly can make only designated Roth elective contributions and designated Roth catch-up contributions. This will allow you to have no pre-tax employer retirement plan contributions to report on Form 1040, Schedule 1, Line 28 and thus no such deduction from QBI.

Topic Author
vnatale
Posts: 96
Joined: Sat Jul 31, 2010 8:50 pm

Re: Contribution deadlines for qualified plans / Mike Piper

Post by vnatale » Sun Apr 14, 2019 4:27 pm

Thank you. Thank you. Thank you!

This was the only piece I needed to resolve before completing my tax return.

Many, many thanks again!

Vinny

Post Reply