lakpr wrote: ↑Thu Mar 14, 2019 8:41 am
If you have the wherewithal to contribute the full $56k to the Solo-401k plan, I'd advise you to do that. Research has shown that there is a 66% chance (2 out of 3) that lump sum investing wins out over dollar cost averaging. Not many can swing all $56k at once.
A 401k is not just a bigger IRA where the timing of contributions does not matter. You can not just make contributions whenever you want. There are very specific IRS 401k regulations regarding the timing of employee elective contributions.
Employee elective contributions can be up to 100% of compensation. However, they are only allowed when "contributions are made after the employee's performance of service with respect to which the contributions are made (or when the cash or other taxable benefit would be currently available, if earlier)."
You must have W-2 compensation or self-employed earned income (business profit - 1/2 SE tax) to make employee elective contributions.
Employer contributions can be made at anytime. However, employer contributions to a 401k during the tax year can NOT be returned, are subject to a 10% excise tax until abated by future employer contribution space. This is a 401k plan error that must be corrected under the IRS Employee Plans Compliance Resolution System (EPCRS).
You might think you know what your earned income will be for the year, but it is really an unnecessary risk. An S-Corp is pretty easy. Whenever you run payroll make an employer contribution = 25% of your wages.
For the self employed, I suggest you be conservative. Make quarterly contributions of 90% of the 20% employer contribution on the same earned income used for your estimated taxes. Make the contributions after the close of the quarter, I.e. 4/15, 6/15, 9/15 and 1/15 of the next year. At no time are you likely to have made an excess employer contribution during the tax year.
Since the fourth quarter's contribution is in the next year. If you have some major problem, some or all of it can be reallocated to that tax year simply by not taking a deduction for the prior year. However, if your estimates are accurate, you will just have about 10% to contribute at tax time.
Of course, you need to show that you have at least $56k income AFTER subtracting the self employment taxes, but I assume you know that.
You need far more than $56K in earned income to make the maximum employee + employer annual additions to a Fidelity SE401k.
An S-Corp shareholder-employee maximizing their employee elective contribution needs $56K - $19K = $37K) / 25% = $148K in W-2 wages + $37K in remaining business profits. If they are only making employer contribution, they need $56K / 25% = $224K in W-2 wages + $56K in remaining business profits.
A self-employed individual maximizing their employee elective contribution needs $56K - $19K = $37K) / 20% = $185K in earned income. If they are only making employer contribution, they need $56K / 20% = $280K in earned income.