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Old 05-21-2013, 01:10 PM
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Join Date: Jan 2013
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Individual 401(k)

Hello,

I work as a tutor and am considered an independent contractor (1099-MISC).

I would like to open an individual Roth 401(k) at one of the mutual fund companies. As I understand it, contributions can be made to the plan in both the employee and employer capacities subject to the following limits:

Employee: $17,500 or 100% of compensation
Employer: 25% of earned income

I know that my employee Roth contributions are not deductible (just as Roth IRA contributions would not be deductible). However, are the employer Roth contributions treated as a business expense? That is, could I deduct the employer part of my contributions on Schedule C (even though it's a solo Roth 401k)? And in general, are there any tax differences between making employer vs. employee contributions to an individual Roth 401(k)?

Thank you!



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Old 05-21-2013, 04:52 PM
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Originally Posted by klj1789 View Post
Hello,



#1; I know that my employee Roth contributions are not deductible (just as Roth IRA contributions would not be deductible).


#2;However, are the employer Roth contributions treated as a business expense? That is, could I deduct the employer part of my contributions on Schedule C (even though it's a solo Roth 401k)?


#3:And in general, are there any tax differences between making employer vs. employee contributions to an individual Roth 401(k)?

Thank you!
#1;Correct. A newer kind of 401k account, a Roth 401k, works in much the same way as a Traditional 401k, with a few important differences. You fund your R- 401k account with after-tax dollars, such as your take-home wages from your job. Because you've already paid taxes on the money you're investing, any withdrawals you make at a later date aren't tax-liable a second time.So, with a R-401k, you delay your tax benefits and reductions until you are ready to withdraw funds.

#2:Employers are permitted to make matching contributions on employees' designated Roth contributions. However, employers' contributions cannot receive the Roth tax treatment. The matching contributions made on account of designated Roth contributions must be allocated to a pre-tax account, just as matching contributions are on traditional, pre-tax elective contributions. You have what is known as a solo or individual 401(k). You may deduct up to $17,500 of 401(k) contributions and $5,000 of catch up contributions (if over age 50) provided you have that much net income. You have the right line of Form 1040. Since you aare self-employed, you are not an employee, nor are you an employer. The rules regarding employer contributions/employee deferral only apply in an environment where you have employees. There is no deduction on Sch Cyou’re your R-401(k) deduction. while no deduction is taken on Sch C, your deductible contribution is limited to the lower of Sch C net income reported on line 29/ 31or $17,500 ($23,000 if over 50). Since it's above the line on 1040 line 28 it's as good as taking it on Sch C anyway.

#3:As described above; Employer matches are made with pretax dollars, and the match accumulates in a separate account that is taxed as ordinary income at withdrawal. for EEs, contributions to Roth 401(k) plans are not tax deductible, but once the money is in the plan, it grows tax free. Roth Solo 401k contributions are made after-tax and are not tax deductible. When the money is taken out at retirement, the earnings and base are still tax free. This makes the R-401K plan more attractive to people who think they will be in a higher tax bracket at retirement than they will be in the contribution year.



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Old 05-21-2013, 07:49 PM
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Thank you for your response, I really appreciate it.

I am self-employed, so just to clarify, you're saying that the employer contributions to an individual Roth 401k are made with pretax dollars? Since I'm self-employed, does that mean that I would claim the employer contribution (regardless whether it is made to an individual traditional or individual Roth account) as an adjustment on Line 28? (In this way, I would get 2 distinct tax benefits from an employer contribution to an individual Roth account - adjustment now and tax-free growth later?)



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Old 05-22-2013, 03:28 AM
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Originally Posted by klj1789 View Post
Thank you for your response, I really appreciate it.

#1:I am self-employed, so just to clarify, you're saying that the employer contributions to an individual Roth 401k are made with pretax dollars?


#2:Since I'm self-employed, does that mean that I would claim the employer contribution (regardless whether it is made to an individual traditional or individual Roth account) as an adjustment on Line 28? (In this way, I would get 2 distinct tax benefits from an employer contribution to an individual Roth account - adjustment now and tax-free growth later?)

#1:It depends; what I mean is that the basic difference between a Self Employed Roth 401k and a Traditional Self Employed 401k is that the Roth 401k is funded with after-tax contributions while the Traditional 401k is funded with pre-tax contributions. In other words, with a Roth 401k you pay taxes today in return for a tax-free withdrawals in retirement. Traditional 401k contributions are tax deductible and are made pre-tax so you save taxes today, but withdrawals are taxed in retirement.



#2:No as said above.
NOTE: As described previously; assume that you have an EE(EEs), then, Employer matches are made with pretax dollars, and the match accumulates in a separate account that is taxed as ordinary income at withdrawal. For EEs, contributions to R-401K plans are NOT tax deductible, but once the money is in the plan, it grows tax free. R-401k contributions are made after-tax and are not tax deductible. When the money is taken out at retirement, the earnings and base are still tax free. When youhave both self –ER 401K and matches for EE, then, after-tax contributions for your self ER R-401K cannot be combined with pre-tax contributions for your EE. As a result, within your Self Employed 401k there will be two separate accounts; one account will be designated for after-tax Roth contributions, the other for pre-tax contributions such as the profit sharing portion of your Self Employed 401k. You will need to segregate tax deductible versus non tax deductible (Roth) account activity when reporting to the IRS.



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