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Posted by Wacheena on February 17, 2007, 4:58 am
Please log in for more thread options Rich Carreiro wrote:
>> 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%.
Excellent. Thanks Rich!
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