SeanParticipantStatus: PhysicianPosts: 103Joined: 01/15/2016
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!! 🙂August 10, 2019 at 3:11 pm MST #237943spiritriderParticipantStatus: Small Business OwnerPosts: 1974Joined: 02/01/2016
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.SeanParticipantStatus: PhysicianPosts: 103Joined: 01/15/2016
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?August 10, 2019 at 5:37 pm MST #237968spiritriderParticipantStatus: Small Business OwnerPosts: 1974Joined: 02/01/2016
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.