Can I contribute to both a Roth IRA and a solo 401k with the "same" income?

[johnanglemen]

Let's say I earn $5000 in a given year for self-employment work. Can I contribute $5000 to both a Roth IRA and a solo 401k? Seems hard to believe, but I'm not finding what disallows that. Thank you.

[123]

You can do it as an employee with a 401k operated by your employer and your own IRA so I would think you could do it as a solo 401K and a Roth IRA. If you can't it would bogle my mind.

[TG2]

I wouldn't think so. The limit for an IRA is the lesser of $5500 ($6500 with catch-up) or the amount of taxable compensation from earned income, is it not? If all of your earned income for the year ($5000) was deferred to a 401k, you would have no taxable compensation remaining, right? Thus no IRA contribution?

And..."bogle my mind?" Here? Come on, dude?

[22twain]

You can contribute to both an employer-sponsored 401k (or 403b) and an IRA, but the total contributions must not exceed your total compensation. I remember seeing it a few years ago in one of the IRS publications, probably 590. I'd be surprised if it were different with a self-employment 401k.

As TG2 noted, the amount of compensation that you defer to your 401k doesn't even show up in box 1 of your W-2, which is what matters here.

Exception: if your spouse also has compensation, and does not "use it all up" with contributions to his/her own 401k/403b/IRA, and you file as MFJ, you can count it for spousal contributions to your IRA in addition to what your compensation allows. Still the same max of $5500 or $6500.

[KlangFool]

OP,

1) If you earned $5,000 for your self-employment, you would need to deduct the self-employment tax to get your income. So, the income would not be $5,000. It will be $5,000 - self-employment tax = X.

2) To the second part of your question, I believe the answer is dependent on what 401K do you refer to?

A) Trad. 401K? If you contribute X to Trad. 401K, you have no income. So, you could not contribute to Roth IRA.

B) Roth 401K? If you contribute to Roth 401K, you have X as your income. Then, you could contribute X to Roth IRA.

This is to the best of my knowledge. We have some 401K expert at the forum that could probably give a more definitive answer.

KlangFool

[DrGoogle2017]

I was able to do this last year for my husband. In fact he was able to contribute more than what he earned in his 1099, we got a negative tax rate in the end. I just played around with the contribution amount and the self employment tax that I had to pay in TurboTax. I settled for the option with the least tax to me.
Not only that, I was able to contribute to Roth as well even though I wasn’t working. But spouse can contribute as long as the other spouse has some earnings.

[johnanglemen]

Hmm lots of conflicting answers here.

To the people saying that there is no compensation if you defer to a trad 401k -- It looks to me like the self-employment income does go onto form 1040 line 12 (business income or loss, schedule C) as income. Then 92.35% of it is removed from AGI in line 28 (self-employed retirement plans) for the 401k contribution (it's 92.35% to account for the self-employment tax deduction). But it is income. There is no W2 here.

[livesoft]

I think Klangfool has it correct. Perhaps the confusion is about the traditional 401(k) versus the Roth 401(k). Money contributed to the traditional 401(k) does not appear in your adjusted gross income at the bottom of Form 1040 and thus doesn't count toward compensation.

But you are welcome to read IRS Publication 590-A where much of this is discussed.

[neurosphere]

One can contribute to an IRA as long as one had sufficient 'compensation'. From publication 590-A:

Self-employment income.

If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:

The deduction for contributions made on your behalf to retirement plans, and
The deduction allowed for the deductible part of your self-employment taxes.

Since the OP mentions self-employment work, I'm wondering if the mention of a 401k refers to a solo 401k belonging to his self-employment business. I assume yes. Thus, the question is whether employee contributions and/or profit sharing contributions to a solo 401k count as contributions "made on your behalf". I think yes, but the reference or 'proof' for that answer lies in a different publication.

Neurosphere

[KlangFool]

Hmm lots of conflicting answers here.

To the people saying that there is no compensation if you defer to a trad 401k -- It looks to me like the self-employment income does go onto form 1040 line 12 (business income or loss, schedule C) as income. Then 92.35% of it is removed from AGI in line 28 (self-employed retirement plans) for the 401k contribution (it's 92.35% to account for the self-employment tax deduction). But it is income. There is no W2 here.

johnanglemen,

Only certain kind of income aka compensation aka earned income count in this case. Business income does not count. Ditto on pension, social security income, and unemployment compensation.

KlangFool

[johnanglemen]

Hmm lots of conflicting answers here.

To the people saying that there is no compensation if you defer to a trad 401k -- It looks to me like the self-employment income does go onto form 1040 line 12 (business income or loss, schedule C) as income. Then 92.35% of it is removed from AGI in line 28 (self-employed retirement plans) for the 401k contribution (it's 92.35% to account for the self-employment tax deduction). But it is income. There is no W2 here.

johnanglemen,

Only certain kind of income aka compensation aka earned income count in this case. Business income does not count. Ditto on pension, social security income, and unemployment compensation.

KlangFool

This is earned income. It's self-employment compensation. That goes on 1040 line 12 (schedule C) in my case.

[KlangFool]

Hmm lots of conflicting answers here.

To the people saying that there is no compensation if you defer to a trad 401k -- It looks to me like the self-employment income does go onto form 1040 line 12 (business income or loss, schedule C) as income. Then 92.35% of it is removed from AGI in line 28 (self-employed retirement plans) for the 401k contribution (it's 92.35% to account for the self-employment tax deduction). But it is income. There is no W2 here.

johnanglemen,

Only certain kind of income aka compensation aka earned income count in this case. Business income does not count. Ditto on pension, social security income, and unemployment compensation.

KlangFool

This is earned income. It's self-employment compensation. That goes on 1040 line 12 (schedule C) in my case.

johnanglemen,

Line 12 = Business income. Depending on what you do with that income, it could be earned income or not. For IRA contribution, it needs to be a salary aka wage aka earned income.

In solo 401K, you have 3 choices in term of that Business income.

A) Use it for profit sharing aka Employer contribution to the Trad. 401K.

B) Employee contribution to the Trad. 401K.

C) Employee contribution to the Roth 401K.

You cannot use (A) and (B) as earned income for contribution to IRAs.

KlangFool

[KlangFool]

https://www.irs.gov/pub/irs-pdf/p590a.pdf

Folks,

Straight from the source: Table 1-1


Includes ...
 earnings and profits from
 property.
wages, salaries, etc.
 interest and
 dividend income.
commissions.
 pension or annuity
 income.
self-employment income.


Does not include ...
 deferred compensation.
alimony and separate maintenance.
 income from certain
 partnerships.
nontaxable combat pay.
 any amounts you exclude
 from income.

I was wrong about the pension. Trad. 401K part of the Solo 401K excludes the amount from income. Hence, it is not counted.

KlangFool

[Soon2BXProgrammer]

https://www.irs.gov/pub/irs-pdf/p590a.pdf

Folks,

Straight from the source: Table 1-1


Includes ...
 earnings and profits from
 property.
wages, salaries, etc.
 interest and
 dividend income.
commissions.
 pension or annuity
 income.
self-employment income.


Does not include ...
 deferred compensation.
alimony and separate maintenance.
 income from certain
 partnerships.
nontaxable combat pay.
 any amounts you exclude
 from income.

I was wrong about the pension. Trad. 401K part of the Solo 401K excludes the amount from income. Hence, it is not counted.

KlangFool

hmm that is really interesting that pensions can count but a deferred compensation plan can not...

[neurosphere]

https://www.irs.gov/pub/irs-pdf/p590a.pdf

Folks,

Straight from the source: Table 1-1....

self-employment income.

Hey, don't I get credit for my first post in this thread? see above.

Pub 590-A goes on to further define self employment income:

Self-employment income.

If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:

The deduction for contributions made on your behalf to retirement plans, and
The deduction allowed for the deductible part of your self-employment taxes.

[DrGoogle2017]

Hmm lots of conflicting answers here.

To the people saying that there is no compensation if you defer to a trad 401k -- It looks to me like the self-employment income does go onto form 1040 line 12 (business income or loss, schedule C) as income. Then 92.35% of it is removed from AGI in line 28 (self-employed retirement plans) for the 401k contribution (it's 92.35% to account for the self-employment tax deduction). But it is income. There is no W2 here.

johnanglemen,

Only certain kind of income aka compensation aka earned income count in this case. Business income does not count. Ditto on pension, social security income, and unemployment compensation.

KlangFool

This is earned income. It's self-employment compensation. That goes on 1040 line 12 (schedule C) in my case.

I looked at the actual return in TT for my husband’s consulting income, line 12 of 1040 is the where business income subtracting the employer’s contribution to pension on line 19 from Schedule C.
Line 27 of 1040 is self-employment tax.
Like 28 of 1040 is deduction for self employment retirement plan for the employee’s portion.

My husband also had some 401k contribution in his regular job. I believe because of that, he ran into a limit, I just don’t remember what it was. But like I wrote earlier, play around with TT software to get the optimum contribution, where you pay the least amount of tax for your situation.

[KlangFool]

Hmm lots of conflicting answers here.

To the people saying that there is no compensation if you defer to a trad 401k -- It looks to me like the self-employment income does go onto form 1040 line 12 (business income or loss, schedule C) as income. Then 92.35% of it is removed from AGI in line 28 (self-employed retirement plans) for the 401k contribution (it's 92.35% to account for the self-employment tax deduction). But it is income. There is no W2 here.

johnanglemen,

Only certain kind of income aka compensation aka earned income count in this case. Business income does not count. Ditto on pension, social security income, and unemployment compensation.

KlangFool

This is earned income. It's self-employment compensation. That goes on 1040 line 12 (schedule C) in my case.

I looked at the actual return in TT for my husband’s consulting income, line 12 of 1040 is the where business income subtracting the employer’s contribution to pension on line 19 from Schedule C.
Line 27 of 1040 is self-employment tax.
Like 28 of 1040 is deduction for self employment retirement plan for the employee’s portion.

My husband also had some 401k contribution in his regular job. I believe because of that, he ran into a limit, I just don’t remember what it was. But like I wrote earlier, play around with TT software to get the optimum contribution, where you pay the least amount of tax for your situation.

DrGoogle2017,

In your case, if you are married and filed a joint return, your income could be used to justify his IRA contribution.

KlangFool

[johnanglemen]

Hmm lots of conflicting answers here.

To the people saying that there is no compensation if you defer to a trad 401k -- It looks to me like the self-employment income does go onto form 1040 line 12 (business income or loss, schedule C) as income. Then 92.35% of it is removed from AGI in line 28 (self-employed retirement plans) for the 401k contribution (it's 92.35% to account for the self-employment tax deduction). But it is income. There is no W2 here.

johnanglemen,

Only certain kind of income aka compensation aka earned income count in this case. Business income does not count. Ditto on pension, social security income, and unemployment compensation.

KlangFool

This is earned income. It's self-employment compensation. That goes on 1040 line 12 (schedule C) in my case.

I looked at the actual return in TT for my husband’s consulting income, line 12 of 1040 is the where business income subtracting the employer’s contribution to pension on line 19 from Schedule C.
Line 27 of 1040 is self-employment tax.
Like 28 of 1040 is deduction for self employment retirement plan for the employee’s portion.

My husband also had some 401k contribution in his regular job. I believe because of that, he ran into a limit, I just don’t remember what it was. But like I wrote earlier, play around with TT software to get the optimum contribution, where you pay the least amount of tax for your situation.

The figure in this line includes my 401k contribution, as calculated by TurboTax. The TT help for that section says not to include 401k contributions there. The 401k contribution is removed from income later, on form 1040 line 28.

That's one of the things that's odd about this whole thing -- I filled out a return with $5000 of self-employment earned income, $5000 Roth IRA contribution and $5000 traditional 401k contribution, and TurboTax had no complaints about that. Not married and no other earned income on the return. Is that really just an oversight in the software, given what others are saying here?

Also, is it the consensus here that there's no problem contributing the 'same' income to both Roth IRA and *Roth* 401k? That is still somewhat surprising to me, that you get to shelter the income amount twice.

[KlangFool]

Hmm lots of conflicting answers here.

To the people saying that there is no compensation if you defer to a trad 401k -- It looks to me like the self-employment income does go onto form 1040 line 12 (business income or loss, schedule C) as income. Then 92.35% of it is removed from AGI in line 28 (self-employed retirement plans) for the 401k contribution (it's 92.35% to account for the self-employment tax deduction). But it is income. There is no W2 here.

johnanglemen,

Only certain kind of income aka compensation aka earned income count in this case. Business income does not count. Ditto on pension, social security income, and unemployment compensation.

KlangFool

This is earned income. It's self-employment compensation. That goes on 1040 line 12 (schedule C) in my case.

I looked at the actual return in TT for my husband’s consulting income, line 12 of 1040 is the where business income subtracting the employer’s contribution to pension on line 19 from Schedule C.
Line 27 of 1040 is self-employment tax.
Like 28 of 1040 is deduction for self employment retirement plan for the employee’s portion.

My husband also had some 401k contribution in his regular job. I believe because of that, he ran into a limit, I just don’t remember what it was. But like I wrote earlier, play around with TT software to get the optimum contribution, where you pay the least amount of tax for your situation.

The figure in this line includes my 401k contribution, as calculated by TurboTax. The TT help for that section says not to include 401k contributions there. The 401k contribution is removed from income later, on form 1040 line 28.

That's one of the things that's odd about this whole thing -- I filled out a return with $5000 of self-employment earned income, $5000 Roth IRA contribution and $5000 traditional 401k contribution, and TurboTax had no complaints about that. Not married and no other earned income on the return. Is that really just an oversight in the software, given what others are saying here?

Also, is it the consensus here that there's no problem contributing the 'same' income to both Roth IRA and *Roth* 401k? That is still somewhat surprising to me, that you get to shelter the income amount twice.

johnanglemen,

Roth 401K is the after-tax contribution. Hence, it is not sheltered. In any case, it does not make any sense for you to contribute to Trad. 401K in this case. At $5,000, you pay 0% tax. So, why would you defer paying 0% tax with Trad 401K contribution? Roth 401K was the right answer for you.

KlangFool

[johnanglemen]

johnanglemen,

Only certain kind of income aka compensation aka earned income count in this case. Business income does not count. Ditto on pension, social security income, and unemployment compensation.

KlangFool

This is earned income. It's self-employment compensation. That goes on 1040 line 12 (schedule C) in my case.

I looked at the actual return in TT for my husband’s consulting income, line 12 of 1040 is the where business income subtracting the employer’s contribution to pension on line 19 from Schedule C.
Line 27 of 1040 is self-employment tax.
Like 28 of 1040 is deduction for self employment retirement plan for the employee’s portion.

My husband also had some 401k contribution in his regular job. I believe because of that, he ran into a limit, I just don’t remember what it was. But like I wrote earlier, play around with TT software to get the optimum contribution, where you pay the least amount of tax for your situation.

The figure in this line includes my 401k contribution, as calculated by TurboTax. The TT help for that section says not to include 401k contributions there. The 401k contribution is removed from income later, on form 1040 line 28.

That's one of the things that's odd about this whole thing -- I filled out a return with $5000 of self-employment earned income, $5000 Roth IRA contribution and $5000 traditional 401k contribution, and TurboTax had no complaints about that. Not married and no other earned income on the return. Is that really just an oversight in the software, given what others are saying here?

Also, is it the consensus here that there's no problem contributing the 'same' income to both Roth IRA and *Roth* 401k? That is still somewhat surprising to me, that you get to shelter the income amount twice.

johnanglemen,

Roth 401K is the after-tax contribution. Hence, it is not sheltered. In any case, it does not make any sense for you to contribute to Trad. 401K in this case. At $5,000, you pay 0% tax. So, why would you defer paying 0% tax with Trad 401K contribution? Roth 401K was the right answer for you.

KlangFool

It is sheltered...you pay no tax on the growth in the account.

I have far more income than $5000, but it is dividend income, not earned income. So, not 0% tax. I am in AMT.

[DrGoogle2017]

Hmm lots of conflicting answers here.

To the people saying that there is no compensation if you defer to a trad 401k -- It looks to me like the self-employment income does go onto form 1040 line 12 (business income or loss, schedule C) as income. Then 92.35% of it is removed from AGI in line 28 (self-employed retirement plans) for the 401k contribution (it's 92.35% to account for the self-employment tax deduction). But it is income. There is no W2 here.

johnanglemen,

Only certain kind of income aka compensation aka earned income count in this case. Business income does not count. Ditto on pension, social security income, and unemployment compensation.

KlangFool

This is earned income. It's self-employment compensation. That goes on 1040 line 12 (schedule C) in my case.

I looked at the actual return in TT for my husband’s consulting income, line 12 of 1040 is the where business income subtracting the employer’s contribution to pension on line 19 from Schedule C.
Line 27 of 1040 is self-employment tax.
Like 28 of 1040 is deduction for self employment retirement plan for the employee’s portion.

My husband also had some 401k contribution in his regular job. I believe because of that, he ran into a limit, I just don’t remember what it was. But like I wrote earlier, play around with TT software to get the optimum contribution, where you pay the least amount of tax for your situation.

DrGoogle2017,

In your case, if you are married and filed a joint return, your income could be used to justify his IRA contribution.

KlangFool

I was unemployed, aka retired.

[DrGoogle2017]

Hmm lots of conflicting answers here.

To the people saying that there is no compensation if you defer to a trad 401k -- It looks to me like the self-employment income does go onto form 1040 line 12 (business income or loss, schedule C) as income. Then 92.35% of it is removed from AGI in line 28 (self-employed retirement plans) for the 401k contribution (it's 92.35% to account for the self-employment tax deduction). But it is income. There is no W2 here.

johnanglemen,

Only certain kind of income aka compensation aka earned income count in this case. Business income does not count. Ditto on pension, social security income, and unemployment compensation.

KlangFool

This is earned income. It's self-employment compensation. That goes on 1040 line 12 (schedule C) in my case.

I looked at the actual return in TT for my husband’s consulting income, line 12 of 1040 is the where business income subtracting the employer’s contribution to pension on line 19 from Schedule C.
Line 27 of 1040 is self-employment tax.
Like 28 of 1040 is deduction for self employment retirement plan for the employee’s portion.

My husband also had some 401k contribution in his regular job. I believe because of that, he ran into a limit, I just don’t remember what it was. But like I wrote earlier, play around with TT software to get the optimum contribution, where you pay the least amount of tax for your situation.

The figure in this line includes my 401k contribution, as calculated by TurboTax. The TT help for that section says not to include 401k contributions there. The 401k contribution is removed from income later, on form 1040 line 28.

That's one of the things that's odd about this whole thing -- I filled out a return with $5000 of self-employment earned income, $5000 Roth IRA contribution and $5000 traditional 401k contribution, and TurboTax had no complaints about that. Not married and no other earned income on the return. Is that really just an oversight in the software, given what others are saying here?

Also, is it the consensus here that there's no problem contributing the 'same' income to both Roth IRA and *Roth* 401k? That is still somewhat surprising to me, that you get to shelter the income amount twice.

I think there might some confusion regarding the term 401k contribution and Solo 401k. My husband’s 401k contribution was already taken out from his paycheck, and his w-2 wage has already affected that. That amount plus his solo 401k cannot exceed the limit of $24k, I believe for people older than 50. He also was able to contribute some amount to Roth IRA. I was also able to contribute to Roth IRA. The combined contribution of both Roth IRAs must be less than his w-2 income. Again going by memory, I remember there was some limitation. That’s how we ended up with negative effective tax rate. So you could be in that situation.