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What constitutes compensation re: NRAT contribution?

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  • What constitutes compensation re: NRAT contribution?

    Thanks to the awesome and voluminous info on here and on other blog sites, I've learned a lot about the much-coveted non-Roth after-tax contribution to a solo 401k.  I understand that the non-Roth amount that can be contributed can be 100% of compensation, as long as you don't exceed the $56k/$62k limit for 2019.

    What I'm still somewhat unsure about is what is meant by compensation.  Is it net profit after business deductions?  Is it net self-employment income (net profit x 0.9235)?  Is it the net adjusted business profit (net self-empl income - 0.5SE tax)?  Help!!

  • #2
    The relevant number is compensation available for annual additions. There are two complications:

    • Employer contributions reduce compensation available for employee + employer annual additions.

    • For > 50% owners of businesses, 403b annual additions reduce the business owner's annual additions.


    First, self-employed earned income = business profits - 1/2 SE taxes.

    The maximum employee after-tax contributions for self-employed individuals owning > 50% of their business(s), is the lesser of:

    • Earned income - employee elective contributions - (any employer contributions * 2).

    • The annual addition limit (2019 = $56K) - 403b annual additions - employee elective contributions.


    If you have no 403b annual additions, you will require a minimum of $70K in self-employed earned income to maximize employee after-tax contributions.

    For example, $70K in self-employed earned income = $70K * 20% = $14K maximum employer contributions, compensation available for annual additions = $70K - $14K = $56K in compensation.

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    • #3
      I meant for self-employed gig.  I am confused about your scenario above:  Earned income - employee contrib - (any employer contrib *2)

      Where did the *2 come from?

      I thought the maximum non-Roth after tax amount for a sole proprietor 1099 only (no W2 work) was:  $56k - $19k employee deferral - pre-tax profit sharing (i.e. 20% of [net profit - 1/2SE] ).  So, in your example above, wouldn't the max non-Roth allowed be  $56k - $19k - $14k = $23k if the doc only had the $70k self-employed earned income without any W2 income?

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      • #4
        As I already explained.  Self-employed employer contributions reduce compensation available for annual additions and then the employer contribution itself reduces the annual addition space available for other contributions. In this case employee after-tax contributions. That is why you must deduct 2X the employer contributions from self-employed earned income.

        In my example, the maximum employee after-tax contribution is $56K - $19K - $14K = $23K. However, that is because there is self-employed earned income of $70K - $14K employer contribution = $56K compensation >= the $56K annual addition limit.

        My point was that you need to keep in mind that if your self-employed earned income in 2019 is < $70K. Your maximum employee after-tax contribution would be limited. You need to understand that there are two annual addition limits. The lesser of the statutory limit (2019 = $56K and 100% of compensation

        For example, if your self-employed earned income is $50K. Then your maximum employee after tax contribution would be $50K - $19K - ($10K * 2 = $20K) = $11K. This is because the $10K employer contribution reduces annual addition compensation to $50K - $10K = $40K. Then an annual limit of $40K - $19K - $10K = $11K.

        For 2019, if your self-employed earned income is > the annual addition limit ($56K) * 1.25 >= $70K, then your maximum employee after-tax contribution is $56K - employee elective contributions - employer contributions.

         

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