[markgca]

My income dropped dramatically this year, so I have a question

I have a sole proprietorship company. Since my income is normally more than enough to cover my 401k contributions, I just contribute it early in the year to get it over with. But my income has dropped below what I suspect is the minimum I need for the max contribution.
I have already contributed the max i.e. 17.5 plus the 5.5 catchup (since I am over 50) for a total of $23k contribution .

But my NET income is going to only be about 15k. Gross income is about $45k (I have large expenses)

I also contributed 6500 (5.5 +1k catchup) to a normal non deductible ira.

Questions:

1) I assume the non deductible ira contribution is OK because the amount is smaller than my net income; is this correct?


2) on the 401k, my contribution was higher than the net income for the business, so I over contributed. I know I can remove the excess as long as I do it before April 15. But I don't know how much I need to remove.

For the calculation; my understanding is that I can contribute the $23k total PLUS 25% profit sharing IF I have enough net income.

So in my example, with a 15k income;
My 401k contribution is capped at 15k
My profit sharing amount would be 25% of 15k or 3.75k

So my total contribution would be 15k +3.75k for a total of 18.75k

Is this correct? If not what am I doing wrong?

Thanks

[AtlantaTaxExpert]

Contact the custodian of the 401(k) plan. They can tell you what is the legal limit of what you can contribute based on your net income in the business. Since he/she will pay a fine if they mis-lead you about what you can contribute, they WILL be sure to get it right.

[markgca]

Contact the custodian of the 401(k) plan. They can tell you what is the legal limit of what you can contribute based on your net income in the business. Since he/she will pay a fine if they mis-lead you about what you can contribute, they WILL be sure to get it right.

Thanks

But that doesn't answer my question.

I am the administrator, and the custodian defers to me.

[ScottGem]

Are you sure you have a 401(k) plan. As far as I recall, such plans do not apply to sole proprietorships. There are similar plans for such organizations. That may or may not have contribution limits.

[markgca]

Are you sure you have a 401(k) plan. As far as I recall, such plans do not apply to sole proprietorships. There are similar plans for such organizations. That may or may not have contribution limits.

Yes I am sure. Sole proprietorships can also have a defined benefit plan, which I also had until recently.

In any event, I am looking for the federal max, NOT my plan max. so referring to the plan document isn't helpful.

[AtlantaTaxExpert]

You need to do the calculations specified in IRS Pub 560, Chapter 5, under Deduction Worksheet for Self-Employed.

[ScottGem]

Yes I am sure. Sole proprietorships can also have a defined benefit plan, which I also had until recently.

I checked further and apparently the IRS has consolidated most defined contribution plans under the 401(k) section of the code. So know, most defined contribution plans are called 401(k)s. But there are different rules for different types of 401(k)s. You probably have a "Solo 401(k)" as described here: Eligibility Rules for the Solo 401k. As noted on that site:

• Solo 401k Contribution Limits - 2014 contribution limit of $52,000 and $57,500 if age 50 or older. View contribution limit examples for a sole proprietorship, partnership, LLC, S corporation and C corporation.

So your limit would be one of those figures depending on your age.