Expert: Allen - 12/11/2008

Question
I am self employed and I receive a mixture of W-2 and 1099 earned income.

My W-2 income comes from teaching courses on a contract basis for a public university. I get paid a lump sum at the end of each quarter and the amount is variable depending on the number of courses I teach and the number of students enrolled. Federal, state, and medicare taxes are withheld, but not social security. There is also a pre-tax withholding for the university’s defined contribution retirement plan. This withholding is mandatory and I have no control over the percentage being withheld. If it matters, the Box 13 Retirement Plan box is checked on the W-2.

This year I want to maximize contributions to my solo 401(k), putting the salary deferral amount ($15,500) in a Roth 401(k) and the profit sharing amount into a regular (non-Roth) 401(k).

Do I need adjust my solo 401(k) contributions by subtracting off the amount that is being withheld for the university’s defined contribution plan? If so, do I take it out of the salary deferral part of the profit sharing part?

Thank You very much for your time and assistance.

Answer
In responding, I am assuming the following:
1. Your 1099 income comes from a business that is unrelated yo your contract with the university.
2. You have set up a solo 401k plan for this business.
3. Your net income from this business is substantially more than $15,500.
4. This business is not incorporated.
5. You are not eligible for the $5,000 catch up contribution for individuals who are at least 50 years old.

It sounds like you are required to make a contribution to the university's 403b or 457b plan. I would check with the school to see whether it's a 403b or 457b.

You make two types of contributions to your solo 401k - salary deferral contributions and profit sharing contributions.

The amount you can contribute to the salary deferral portion of this plan is $15,500 reduced by any contributions to another 401k or 403b plan. So if the university's plan is a 403b, you must reduce the amount you contribute to the salary deferral portion of your solo 401k plan by your salary deferral contributions to the 403b. On the other hand, if the university's plan is a 457b plan, then you can contribute the full $15,500 to your 401k.

The amount you can contribute to the profit sharing portion of your solo 401k plan is 20% of the net income from your business minus 50% of the self employment tax paid on that income. In other words if your net income is $51,000 and 50% of the self employment tax paid on that income is $1,000, then the maximum contribution to the profit sharing portion of your plan is $10,000. The maximum amount you can contribute to both portions of your plan is $46,000.