Can my contributions to Self-Employed 401k + to IRA total more than total earned income? Or am I limited to my total earned income between the two?

[clearsynergy1]

We have total earned income of $20,000 on Schedule C (no other earned income). 

TurboTax is allowing $5,500 for my Roth IRA, $5,500 for my spouse IRA... AND also indicates I can make  a contribution of $18,000 to my Self-Employed Roth 401k. Is this right, or are we limited to the $20,000 earned income between our IRA's and the 401k? Thanks!

[dmertz · Accepted solution]

No, you cannot make $18,000 in elective deferrals and $5,500 to each spouse's Roth IRA.  The total of the deductible portion of your self-employment taxes, IRA contributions and self-employed retirement deduction cannot exceed your net profit from self employment.  However, contributions to a Roth 401(k) do not reduce the amount of your income available to support the Roth RIA contributions.

TurboTax tells you that you can defer $18,000 to an individual 401(k) because the elective deferral has priority over your Roth IRA contributions.  Indicating that your elective deferral to the 401(k) is $18,000 will cause most of the  Roth IRA contributions to be excess contributions.  TurboTax will calculate the amounts of the excess contributions and report the excess contributions on Form 5329, resulting in penalties on Form 1040 line 59.

In forms mode, examine the Keogh, SEP and SIMPLE Contribution Worksheet and the Roth IRA Contribution Limit Worksheet.

[Critter]

This is one of those times that working the program in the order presented is so important. If you had indicated that you would make the full $18K 401K contribution in the Sch C section then the IRA section would warn you of the IRA limitations due to the 401K contributions.