Solo 401(k) limits

[JCH]

I have a client with net Sch C income of 32,000. She setup a Solo 401(k) and has contributed $15,500. She's also contributed $4,000 to a non-deductible IRA. Now she wants to max out the employer portion of the 401(k). Is the total she can contribute to the 401(k) limited to her net income for Sch C? $32,000 - 4000- 15,500 = 12,500 employer contribution. Anyone have experience in this area and retirement plan limits in this type of situation? Thank you.

[veritas]

Solo 401k

under 50 the wage deferral is $15,500. The profit sharing amount is 20% of net income after dedcuting one half of self employment tax. Maximum contribution is $45,000.

See page 13-2 in TTB.

[JCH]

Thank you. I'm still wondering if my client can make a non-deductible IRA contribution of $4,000 for 2007 in addition to these amounts. Since the IRA contribution is non-deductible does this matter as far as limits are concerned?

[Bees Knees]

I have a client with net Sch C income of 32,000. She setup a Solo 401(k) and has contributed $15,500. She's also contributed $4,000 to a non-deductible IRA. Now she wants to max out the employer portion of the 401(k). Is the total she can contribute to the 401(k) limited to her net income for Sch C? $32,000 - 4000- 15,500 = 12,500 employer contribution. Anyone have experience in this area and retirement plan limits in this type of situation? Thank you.

The calculation is $32,000 minus 1/2 SE tax times 20% = employer contribution ($5,948 assuming no other SE or FICA income). The $15,500 elective deferral and IRA contribution do not factor into that equation. Also, if taxpayer's AGI is below the IRA deductible phase-out amounts, the $4,000 IRA may also be deductible. For example, if she is single with no other income, her $32,000 of net Schedule C income would be below the $52,000 starting phase-out amount for IRAs in 2007.

The example in TTB, page 13-19 illustrates the calculation as follows:

Example: Tammy is under age 50 and is a selfemployed
author. She collects royalties from a
publisher who published her novel. Her husband
Corey also works, and they pay most of their bills
with his salary alone. They wish to put away as
much as possible to a qualified retirement plan
for Tammy. She sets up a single-participant safe
harbor 401(k) plan for herself. Her net profit after the one-half SE tax
deduction for 2007 is $30,000. She contributes the maximum elective
deferral of $15,500 to the plan. The plan is also set up to contribute the
maximum employer deduction allowed under Section 404(a)(3), which is
25% for employees, or 20% for self-employed individuals. Since elective
deferrals do not reduce compensation for purposes of the deduction
limit, her employer matching contribution is $6,000 ($30,000 × 20%). The
total of employer contributions ($6,000) plus elective deferrals ($15,500)
equals $21,500, which is 71.67% of her total SE earnings.

[JCH]

thanks. I appreciate the detailed response.