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I set up a self-employed individual 401k and am confused about the limits on this.

I'm a sole proprietor with no other employer-provided 401k than this one I set up on my own. It seems I can make contributions as employee-elective, employer match, or profit sharing; yet they all end up in the same 401k from my money since I'm both the employer and employee in this situation.

Let's say I have 15k income and 5k business deductions, resulting in 10k net income. What does this mean for my allowed limits for each of the 3 types of contributions? Are all 3 types deductible?

EDIT:

  • employee limit: 17.5k for 2014, unless net income lower
  • employer limit: 25% of compensation (net income - 1/2 SE tax - contribution)
  • employee+employer: not exceeding total of $52,000 for 2014

Still unsure of how to calculate maximum contribution for a net income of less than 17.5k

For instance with a 10k net income, 9293 is the limit for 401k from employee. How is this calculated? I believe this limit is total for all sources too, which I'm confused about.

  • Is this a duplicate of this question? – Joe Dec 2 '14 at 22:55
  • I believe this limit is total for all sources too - what makes you believe that? – littleadv Dec 3 '14 at 3:23
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It seems I can make contributions as employee-elective, employer match, or profit sharing; yet they all end up in the same 401k from my money since I'm both the employer and employee in this situation.

Correct.

What does this mean for my allowed limits for each of the 3 types of contributions? Are all 3 types deductible?

"Deductible"? Nothing is deductible.

First you need to calculate your "compensation". According to the IRS, it is this:

compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

  • one-half of your self-employment tax, and
  • contributions for yourself.

So assuming (numbers for example, not real numbers) your business netted $30, and $500 is the SE tax (half). You contributed $17.5 (max) for yourself. Your compensation is thus 30-17.5-0.5=12. Your business can contribute up to 25% of that on your behalf, i.e.: $4K. Total that you can contribute in such a scenario is $21.5K.

Whatever is contributed to a regular 401k is deferred, i.e.: excluded from income for the current year and taxed when you withdraw it from 401k (not "deducted" - deferred).

  • Curiosity: For a sole proprietorship, what's the advantage of a 401(k) versus an IRA? I presume it's the ability to have the business match the contribution, but I'm not sure how that works out in terms of taxes on the business compared to just issuing yourself that much more in salary and dropping it into an IRA. – keshlam Dec 3 '14 at 0:02
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    @keshlam IRA is limited to $5K, 401k is limited to $51k, and they are not necessarily mutually exclusive. – littleadv Dec 3 '14 at 0:22
  • Knew they weren't mutually exclusive; wasn't aware the yearly ceiling was that far different. (Wow.) – keshlam Dec 3 '14 at 0:36
  • Great explanation. See edit to question about how to calculate situation when income is less than 17.5k. – Miro Dec 3 '14 at 3:17
  • @Miro I don't understand what confuses you. If your total net is less than 17K - then you can put it all as employee contribution. – littleadv Dec 3 '14 at 3:22
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I can only address this part of it:

For instance with a 10k net income, 9293 is the limit for 401k from employee. How is this calculated? I believe this limit is total for all sources too, which I'm confused about.

How it's calculated is that when you are self-employed you also pay the employer portion of the FICA taxes. This comes off above the line and is not considered income. The 401k contribution limit takes this into account.

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