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Is the Solo Roth 401K Contribution Subject to the 'Earned Income' Limit (i.e. Net Earnings Minus 1/2 Self-Employment Tax Deduction)?

Hello,

 

I'm not sure if I've over-contributed to my Solo ROTH 401k or not:

 

i) I contributed $18,000 to my Solo ROTH 401k for 2021 and $200 to my Solo Individual 401k for 2021

 

ii) When I have TurboTax calculate my max. Self-Employed Retirement Deduction allowed, it gives me a total of $17,395

 

iii) In reviewing the IRS documentation for Solo 401k plans (https://www.irs.gov/retirement-plans/one-participant-401k-plans), it states: "You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both: i) one-half of your self-employment tax, and ii) contributions for yourself.

***However, I'm not sure if this applies to both the Individual Solo 401k plan AND the ROTH Solo 401k plan, or just the Individual (deductible) plan??**

 

iv) My Net Earnings are > $18,000, however, if I subtract out the deductible portion of my Self-Employment tax from my Net Earnings, my total becomes less than $18,000

 

v) TurboTax isn't giving me any errors re: over-contributing to my Solo ROTH 401k

 

vi) Is my Solo ROTH 401k contribution of $18,000 okay for 2021, or do I need to reduce the contribution of both Solo 401k contributions to TOTAL $17,395?

 

Thank you!

PS

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1 Best answer

Accepted Solutions
dmertz
Level 15

Is the Solo Roth 401K Contribution Subject to the 'Earned Income' Limit (i.e. Net Earnings Minus 1/2 Self-Employment Tax Deduction)?

I'll assume that you have not maxed out the Social Security wage limit when combined with wages reported on a W-2.  If your net profit from self employment is $18,718, resulting in net earnings of $17,395, the maximum combined contributions you can make to the solo 401(k) is $17,395.  So you have $805 of excess contributions.

 

The deadline for obtaining a corrective distribution was April 15 (not the due date of your tax return), so it seems that it's too late to make the correction, but you should check with your solo 401(k) provider.  If corrective distributions are not made by the deadline, the $200 contributed as a traditional elective deferral is not deductible and will be taxed again when eventually distributed.  Similarly, the excess $605 contributed to the designated Roth account will be taxable when eventually distributed.  This double taxation of the money is the penalty for making an excess contribution.  The first money distributed from the Roth 401(k) will be the taxable excess, but because your solo 401(k) provider has no way of knowing that there was an excess Roth contribution, you'll have to track that yourself and pay the tax on the first $605 distributed from the Roth 401(k) with any amount distributed beyond that taxable as an ordinary Roth 401(k) distribution.  You'll likely have to submit a substitute Form 1099-R (Form 4852) when you take that distribution since the one provided by the solo 401(k) provider will not show the correct taxable and nontaxable amounts unless you tell the provider the amount of your excess Roth contribution and they track it.

 

Note that allowing excess contributions to be made can potentially disqualify the plan, so if the corrective distributions are not made by the deadline, you might want to make the distributions of the excess relatively soon:

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-li...

View solution in original post

5 Replies

Is the Solo Roth 401K Contribution Subject to the 'Earned Income' Limit (i.e. Net Earnings Minus 1/2 Self-Employment Tax Deduction)?

*Update: TurboTax IS telling me that I've over-contributed $200 to my Solo 401k plans and need to take out the excess contributions; however, subtracting $200 from $18,200 (total contributed across Solo 401k plans for 2021) still doesn't net to the $17,395 'max.' Self-Employed Retirement Deduction allowed stated by TurboTax in the earlier step.

 

So, I'm not sure if I should only take out $200 excess contributions or $18,200-$17,395 = $805 in excess contributions?

dmertz
Level 15

Is the Solo Roth 401K Contribution Subject to the 'Earned Income' Limit (i.e. Net Earnings Minus 1/2 Self-Employment Tax Deduction)?

I'll assume that you have not maxed out the Social Security wage limit when combined with wages reported on a W-2.  If your net profit from self employment is $18,718, resulting in net earnings of $17,395, the maximum combined contributions you can make to the solo 401(k) is $17,395.  So you have $805 of excess contributions.

 

The deadline for obtaining a corrective distribution was April 15 (not the due date of your tax return), so it seems that it's too late to make the correction, but you should check with your solo 401(k) provider.  If corrective distributions are not made by the deadline, the $200 contributed as a traditional elective deferral is not deductible and will be taxed again when eventually distributed.  Similarly, the excess $605 contributed to the designated Roth account will be taxable when eventually distributed.  This double taxation of the money is the penalty for making an excess contribution.  The first money distributed from the Roth 401(k) will be the taxable excess, but because your solo 401(k) provider has no way of knowing that there was an excess Roth contribution, you'll have to track that yourself and pay the tax on the first $605 distributed from the Roth 401(k) with any amount distributed beyond that taxable as an ordinary Roth 401(k) distribution.  You'll likely have to submit a substitute Form 1099-R (Form 4852) when you take that distribution since the one provided by the solo 401(k) provider will not show the correct taxable and nontaxable amounts unless you tell the provider the amount of your excess Roth contribution and they track it.

 

Note that allowing excess contributions to be made can potentially disqualify the plan, so if the corrective distributions are not made by the deadline, you might want to make the distributions of the excess relatively soon:

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-li...

Is the Solo Roth 401K Contribution Subject to the 'Earned Income' Limit (i.e. Net Earnings Minus 1/2 Self-Employment Tax Deduction)?

This is incredibly helpful - appreciate the thorough response & guidance! Thank you!

dmertz
Level 15

Is the Solo Roth 401K Contribution Subject to the 'Earned Income' Limit (i.e. Net Earnings Minus 1/2 Self-Employment Tax Deduction)?

Based on Section 7503, it appears that April 15 deadline to obtain a corrective distribution moves to today, April 18, 2022.

Is the Solo Roth 401K Contribution Subject to the 'Earned Income' Limit (i.e. Net Earnings Minus 1/2 Self-Employment Tax Deduction)?

Thank you for looking into this! 🙏😊

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