401(k) Contributions


W

Wacheena

I am a full time employee and contributed $15,000 to an
employer sponsored 401(k) in 2006. I also have a home
business with a net profit of 9440.00 in 2006.

I would like to place as much of my home business profit
into my self employed 401(k) as possible. Can anyone get me
started down the right path for the calculation?

Thanks!
 
Last edited by a moderator:
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R

Rich Carreiro

Wacheena said:
I am a full time employee and contributed $15,000 to an
employer sponsored 401(k) in 2006. I also have a home
business with a net profit of 9440.00 in 2006.

I would like to place as much of my home business profit
into my self employed 401(k) as possible. Can anyone get me
started down the right path for the calculation?
As I recall, Fidelity (among others) has a self-employed
401(k) contribution worksheet.

However, the short version is that:
(a) the deferral component of contribution is aggregated
across ALL 401(k)s you participate in. Since you
deferred the full $15K at your day job, you can't
make any more deferral contributions.
(b) however, the profit-sharing component of contribution
is per-employer. So regardless of what match (if any)
your day job employer gave you, you can still make
a profit-sharing contribution into your self-employed
401(k). Assuming you're a sole proprietor, your max
contribution will be 20%[*] of (net profit minus 1/2
of SE tax).

Since $9440 of profit results in $1334 of SE tax, one half
of that is $667, so your max contribution will be
0.20 * ($9440 - $667) = $1755.

[*] Yes, the publications say 25% of adjusted net profit,
but for a sole prop., the contribution itself has to be
deducted from the amount you take the 25% of. When you
solve the recursion that requirement creates, it turns
out to transform the 25% into 20%.
 
Last edited by a moderator:
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W

Wacheena

As I recall, Fidelity (among others) has a self-employed
401(k) contribution worksheet.

However, the short version is that:
(a) the deferral component of contribution is aggregated
across ALL 401(k)s you participate in. Since you
deferred the full $15K at your day job, you can't
make any more deferral contributions.
(b) however, the profit-sharing component of contribution
is per-employer. So regardless of what match (if any)
your day job employer gave you, you can still make
a profit-sharing contribution into your self-employed
401(k). Assuming you're a sole proprietor, your max
contribution will be 20%[*] of (net profit minus 1/2
of SE tax).

Since $9440 of profit results in $1334 of SE tax, one half
of that is $667, so your max contribution will be
0.20 * ($9440 - $667) = $1755.

[*] Yes, the publications say 25% of adjusted net profit,
but for a sole prop., the contribution itself has to be
deducted from the amount you take the 25% of. When you
solve the recursion that requirement creates, it turns
out to transform the 25% into 20%.
Excellent. Thanks Rich!
 
Last edited by a moderator:

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