Solo 401K and 1040

I have a full time job (with Simple-IRA) and a part-time consulting business (sole prop with no employees). I maxed out Simple-IRA. I opened a solo 401k last year and contributed to it. I want to know how to handle my contribution and profit -sharing contribution. It seems that both these amounts would go on line 28 of 1040 rather than the profit-share going on Sch C. In such a case, how does the IRS calculate whether or not I have exceeded $14K contribution in defined plans since this 14K does not include profit-share. i.e 1040 form would show that I put in $10K in Simple-IRA, put in 4K for solo 401K and put in another 10K as profit-share. Thanks

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Reply to
NKaufman
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The IRS doesn't calculate this, you do. (But they may also caculate it just to check up on your arithmetic.)

Your full-time job will have given you a W2 which should show the amount contributed to that employer's 401K plan, probably on line 12b code D. You need to subtract this from the overall $14K elective deferral limit when making your Solo-401K contribution, (which as you note above has both the elective deferral and profit- sharing components, and could be as large as $42K) and the total amount you contribute to your solo 401K is the amount that goes on line

  1. 3(b)'s and some other plans also count towards the same
14K elective defferal limit.

Nothing on Schedule C relates to your retirement plan(s), unless you have employees.

Hope this helps.

Steve

Reply to
Steve Pope

the question that remains is that for sole props - Line 28 contains both the employee deferral as well as the company contribution. So in the above scenario, my W-2 shows 10K for my plan at work, but line 28 now shows $14K (4K my deferral and 10K employer contribution). so you mean to tell me that IRS does not look into the breakdown of this line?

Reply to
NKaufman

No, you only put the $4K on line 28. The $10K deferred by your employer has already been subtracted from the appropriate box of W-2. Steve

Reply to
Steve Pope

I think using $10K at two places might be confusing you.

So to start over - let's say I put away $10K in Simple-IRA at work, $4K from side business and another $12K from business as profit share. so, now - $10K is not involved at all since it is mentioned in W-2. However for the portion of side business - line 28 includes both 4K and 12K (it is my understanding that for a sole prop, one cannot deduct profit share as an expense unless it is for another employee). hence both amounts are added and included on line 28. does that sound right? if yes, then how does the IRS make sure that I did not exceed $14K total contribution in a year?

Reply to
NKaufman

Correct.

Correct.

(a) IRS knows your side-business profit, and therefore can calculate your max possible profit-sharing contribution. (b) IRS subtracts (a) from line 28 to get how much of line 28 is your "employee" contribution. (c) IRS knows from your W-2 from your day job how much you contributed to the SIMPLE-IRA. (d) IRS adds (b) and (c) to see if you've gone over the limit.

That's not perfect, of course. If you didn't make the max profit-sharing contribution the calculation will lead the IRS to believe you made a higher "employee" contribution than you really did.

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

Reply to
Rich Carreiro

Yes.

The IRS knows the total amount you may contribute to a Solo

401(k) plan, based on the profit from your schedule C and the details of your schedule SE, and upon any other elective deferal plans for it has information reports, such as the Simple-IRA you have with your employer. So an IRS computer could, at least in some cases, flag excessive amounts on line 28.

But I can think of cases where this is not true, for example, if the self-employed qualified retirement plan was a traditional 401(a) (formerly Keogh), instead of a solo

401(k), the IRS would seem to have no way of knowing this from examining 1040 even though the allowed contributions are (usually) less for the Keogh. It would pop up when they eventually examine the plan itself (form 5500). Steve
Reply to
Steve Pope

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