401k options [Can I open a solo 401(k)?]

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domer621
Posts: 2
Joined: Fri Feb 08, 2019 8:43 pm

401k options [Can I open a solo 401(k)?]

Post by domer621 » Fri Feb 08, 2019 8:55 pm

Hi all,
I am currently a W2 employee and my employer has a 401k plan of which they contribute $5,000 per year into without a match. I'm planning on deferring an additional $14,000 to max that 401k this year. I also have 1099 income. My question is can I open a solo 401k for the 1099 income and contribute to get up to the $56,000 annual maximum? Thank you.

lstone19
Posts: 336
Joined: Fri Nov 03, 2017 3:33 pm

Re: 401k options [Can I open a solo 401(k)?]

Post by lstone19 » Fri Feb 08, 2019 11:07 pm

You appear to be confused about how the limits work. You are limited to $19,000 per year in employEE contributions across all your 401k plans (including a solo 401k). EmployER contributions are in addition to that, with the total (including employEE contributions), again across all your 401k plans, limited to $56,000. The $5,000 you mentioned sounds like an employER contribution that counts only toward the $56k, not to the employEE contribution limit of $19k.

If you contribute the maximum $19k in employEE contributions to the 401k of your W-2 employer, you cannot make an employEE contribution to a solo 401k but you can still make an employER contribution up to 20% of your net income. Note however, that it currently appears that all contributions, both employEE and employER, to a solo 401k, reduce your QBI (qualified business income) for purposes of the 20% QBI deduction.

CFM300
Posts: 1408
Joined: Sat Oct 27, 2007 5:13 am

Re: 401k options [Can I open a solo 401(k)?]

Post by CFM300 » Fri Feb 08, 2019 11:45 pm

lstone19 wrote:
Fri Feb 08, 2019 11:07 pm
Note however, that it currently appears that all contributions, both employEE and employER, to a solo 401k, reduce your QBI (qualified business income) for purposes of the 20% QBI deduction. (emphasis added)
Is there some reason to think that this might change?

Spirit Rider
Posts: 9743
Joined: Fri Mar 02, 2007 2:39 pm

Re: 401k options [Can I open a solo 401(k)?]

Post by Spirit Rider » Sat Feb 09, 2019 11:27 am

lstone19 wrote:
Fri Feb 08, 2019 11:07 pm
You appear to be confused about how the limits work. You are limited to $19,000 per year in employEE contributions across all your 401k plans (including a solo 401k). EmployER contributions are in addition to that, with the total (including employEE contributions), again across all your 401k plans, limited to $56,000. The $5,000 you mentioned sounds like an employER contribution that counts only toward the $56k, not to the employEE contribution limit of $19k.
The bolded part is not entirely correct.

The employee elective contribution limit (2019 = $19K) is across all 401k, 403b, SARSEP and SIMPLE IRA plans combined.
The employee + employer annual addition limit (2019 = $56K) is separate for each unaffiliated* employer.

As noted by @lstone19, the OP can make the full employee elective contribution of $19K in addition to the $5K employer contribution to their W-2 401k. The OP is limited to an employer contribution of up to 20% of net self-employment earnings (business profit - 1/2 SE tax) not to exceed $56K to a one-participant 401k.

*However, 403b plans are considered controlled by the participant and thus an affiliated employer. In this case there is only one annual addition limit for a 403b and a one-participant 401k of a business owned > 50% by the 403b participant.
CFM300 wrote:
Fri Feb 08, 2019 11:45 pm
lstone19 wrote:
Fri Feb 08, 2019 11:07 pm
Note however, that it currently appears that all contributions, both employEE and employER, to a solo 401k, reduce your QBI (qualified business income) for purposes of the 20% QBI deduction. (emphasis added)
Is there some reason to think that this might change?
There is some possible ambiguity in the IRS final 199A regulations on whether pre-tax employee deferrals reduce QBI, but current TurboTax releases, deduct both employEE pre-tax and employER retirement plan contributions from QBI.

It would be nice if the IRS definitively included a "Deductions to QBI" worksheet or added the deductions to the "Qualified Business Income Deduction" worksheet in the Form 1040 Instructions and Publication 535,

lstone19
Posts: 336
Joined: Fri Nov 03, 2017 3:33 pm

Re: 401k options [Can I open a solo 401(k)?]

Post by lstone19 » Sat Feb 09, 2019 11:52 am

Spirit Rider wrote:
Sat Feb 09, 2019 11:27 am
lstone19 wrote:
Fri Feb 08, 2019 11:07 pm
You appear to be confused about how the limits work. You are limited to $19,000 per year in employEE contributions across all your 401k plans (including a solo 401k). EmployER contributions are in addition to that, with the total (including employEE contributions), again across all your 401k plans, limited to $56,000. The $5,000 you mentioned sounds like an employER contribution that counts only toward the $56k, not to the employEE contribution limit of $19k.
The bolded part is not entirely correct.

The employee elective contribution limit (2019 = $19K) is across all 401k, 403b, SARSEP and SIMPLE IRA plans combined.
The employee + employer annual addition limit (2019 = $56K) is separate for each unaffiliated* employer.
Spirit Rider, thank you for the correction.

CFM300
Posts: 1408
Joined: Sat Oct 27, 2007 5:13 am

Re: 401k options [Can I open a solo 401(k)?]

Post by CFM300 » Sun Feb 10, 2019 3:37 am

Spirit Rider wrote:
Sat Feb 09, 2019 11:27 am
There is some possible ambiguity in the IRS final 199A regulations on whether pre-tax employee deferrals reduce QBI, but current TurboTax releases, deduct both employEE pre-tax and employER retirement plan contributions from QBI.

It would be nice if the IRS definitively included a "Deductions to QBI" worksheet or added the deductions to the "Qualified Business Income Deduction" worksheet in the Form 1040 Instructions and Publication 535,
So what advice would you have for someone filing with QBI? I'm using TurboTax and understand how they're currently calculating deductions, but should I wait as late as possible to file because the calculations might change? I'm due a refund, so could even file for an extension without any problem.

Spirit Rider
Posts: 9743
Joined: Fri Mar 02, 2007 2:39 pm

Re: 401k options [Can I open a solo 401(k)?]

Post by Spirit Rider » Sun Feb 10, 2019 9:28 am

CFM300 wrote:
Sun Feb 10, 2019 3:37 am
So what advice would you have for someone filing with QBI? I'm using TurboTax and understand how they're currently calculating deductions, but should I wait as late as possible to file because the calculations might change? I'm due a refund, so could even file for an extension without any problem.
Everyone should make their own determination.

On one hand, the IRS language is imprecise with no actual worksheet entries.

On the other hand, TurboTax updated their software to deduct both pre-tax employee and employer contributions. One would presume they have very good tax lawyers and direct contacts with the IRS.

Additional tax software companies have announced updates to fully implement the QBI deduction later this month.

Personally, I would be most comfortable with filing a return containing the QBI deduction anytime after 3/1.

CFM300
Posts: 1408
Joined: Sat Oct 27, 2007 5:13 am

Re: 401k options [Can I open a solo 401(k)?]

Post by CFM300 » Sun Feb 10, 2019 12:03 pm

Thanks, Spirit Rider. I appreciate your advice.

Topic Author
domer621
Posts: 2
Joined: Fri Feb 08, 2019 8:43 pm

Re: 401k options [Can I open a solo 401(k)?]

Post by domer621 » Sun Feb 10, 2019 12:34 pm

Thank you all very much for the helpful replies.

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