Individual 401k contributions / deduction

[Andrew S.]

Happy Monday everyone,

I was listening to the BP money podcast and learned about the individual or solo 401k option.  I have a W2 job with a 401k plan and rentals as my side business.  I contribute ~$15k and my company matches 8% into my 401k program. 

From my recent research - I can open up an individual 401k or solo 401k and contribute as the employer and employee.  

I'd like to contribute ~$5k from my rental business as the employeer.  Do I list this on the Schedule E to lower my profit?  What if this takes my business into a paper loss for the year on my Sch E?

Are these the accurate limits? 

-$19.5k to my W2 employer's 401k program

and solo 401K: $57k 2020 max - $19.5k = $37,500 split between employeer and solo 401k employee contritbutions? 

This statement from the IRS website - I can't figure out if I can put in $19.5 in my W2 401k & up to $19.5k in my solo 401k as the employee or a total between the 2 up to $19.5k?  

A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan.

Thank you!

From IRS website:

Contribution limits in a one-participant 401(k) plan

The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:

• Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
  • $19,500 in 2020 and 2021, or $26,000 in 2020and 2021 if age 50 or over; plus
• Employer nonelective contributions up to:
  • 25% of compensation as defined by the plan, or
  • for self-employed individuals, see discussion below

If you’ve exceeded the limit for elective deferrals in your 401(k) plan, find out how to correct this mistake.

Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $57,000 (for 2020; $58,000 for 2021).

Example: Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2020. He deferred $19,500 in regular elective deferrals plus $6,500 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2020 were $38,500. This is the maximum that can be contributed to the plan for Ben for 2019.

A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan. He must consider the limit for all elective deferrals he makes during a year.

[Brian Eastman]

@Andrew S.

Rental income is passive in nature and does not qualify as a business to sponsor a Solo 401(k) or the type of income to contribute to a 401(k).

Schedule E passive income is good.  It is possible but likely not beneficial to recharacterize some of that schedule E income to management services schedule C income that could sponsor a 401(k) plan.