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Max Contribution Limit for Employer Profit Sharing

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  • Avatar southernerdoc 
    Participant
    Status: Physician
    Posts: 41
    Joined: 03/10/2019

    I know the maximum is $55,000 for 2018 and $56,000 for 2019, but there is something in IRS Publication 560 that confuses me.  It states that for sole proprietors, income up to $275,000 (2018) or $280,000 (2019) may be used for calculation purposes.

    When using the maximum, the maximum employer profit sharing for 2018 is $52,668 and for 2019 is $53,602.

    Without employee contributions, how does one max out employer contributions since the income limits prevent higher contributions?

    #206480 Reply
    Avatar jhwkr542 
    Participant
    Status: Physician
    Posts: 1142
    Joined: 02/15/2016

    Where are you getting your numbers? 20% of $280,000 is $56,000.

    #206486 Reply
    Avatar southernerdoc 
    Participant
    Status: Physician
    Posts: 41
    Joined: 03/10/2019

    I think I found out the confusion.  I was using an online calculator and I thought that the max income you can base it on (before deduction of self-employment tax) was $280k.

    #206494 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 885
    Joined: 01/09/2016

    I know the maximum is $55,000 for 2018 and $56,000 for 2019, but there is something in IRS Publication 560 that confuses me.  It states that for sole proprietors, income up to $275,000 (2018) or $280,000 (2019) may be used for calculation purposes.

    When using the maximum, the maximum employer profit sharing for 2018 is $52,668 and for 2019 is $53,602.

    Without employee contributions, how does one max out employer contributions since the income limits prevent higher contributions?

    Click to expand…

    That, and if you do any salary deferral/matching, your $56k will be comprised of $19k + 4% match (or 3% non-elective) and the rest as PS, so unless you are doing PS-only plan (which is a bad idea in any case as that means that your plan is not a 401k).  Also, maximum contribution can be reached with a lot lower W2 with a 401k vs. profit-sharing only plan.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #206794 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    the 275000 limit refers to compensation, which is different than net self employment earnings, which the 20% limit applies to. When referring to compensation, the profit sharing limit is 25%. So a sole prop could actually reach a 2018 plan annual addition limit through only profit sharing with 220000 in compensation.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #206801 Reply
    Avatar southernerdoc 
    Participant
    Status: Physician
    Posts: 41
    Joined: 03/10/2019

    Kon, can you not fund a Solo 401(k) as profit sharing only until I reach 50 where I can do catchup contributions?

    I just opened it last year with an effective date of 1/1/18.  I’m contributing employee salary deferrals for 2019, but didn’t in 2018.  I was planning to make a $55,000 contribution in a few months as a 2018 profit sharing contribution (I filed a tax extension).

    Are you saying this is a bad idea, or is it only a bad idea if you contribute only profit sharing every year?  Why is it a bad idea?

    #207030 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 885
    Joined: 01/09/2016
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    Kon, can you not fund a Solo 401(k) as profit sharing only until I reach 50 where I can do catchup contributions?

    I just opened it last year with an effective date of 1/1/18.  I’m contributing employee salary deferrals for 2019, but didn’t in 2018.  I was planning to make a $55,000 contribution in a few months as a 2018 profit sharing contribution (I filed a tax extension).

    Are you saying this is a bad idea, or is it only a bad idea if you contribute only profit sharing every year?  Why is it a bad idea?

    Click to expand…

    Sure you can, I was referring to certain profit sharing plans that some older groups have where they don’t have a 401k option at all (thus no catch-up, no Roth, no in-plan Roth rollover, etc).  These PS plans don’t always play well with Cash Balance plans, especially if the group can’t also do maximum PS as a result (vs. 401k that allows additional salary deferral and 3% non-elective contribution). If you have a solo 401k, you can fund it in any way you’d like.  This usually requires a higher W2, but if you do have a higher W2, then you are fine.  The W2 part is tricky because of QBI considerations, in which case you might want to keep your W2 lower.  But if your net is very high in any case, then you don’t really care, as you have to pay yourself a reasonable W2.  Maximum PS is actually 25% with a W2, so you can max out with a W2 of $224k if I’m not mistaken.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #207094 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1750
    Joined: 02/01/2016

    There is no inherent reason you can’t make all non-elective employer contributions to a one-participant 401k if you have sufficient compensation to reach the annual limit.

    I think Kon might have been thinking you had eligible employees and a safe harbor 401k.

    Keep in mind, after age 50 catch-up contributions can only be employee deferrals or designated Roth contributions. They can only be made after you have reach the 402g limit with the same.

    #207095 Reply

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