severance and retirement saving

[GB2424]

Hi. I was paid severance throughout 2022, but was ineligible for participating in former employer's 401k. I also made some money from self-employment gigs. Say 200,000 gross pay from the former employer, and 20,000 self-employment gross income. I will make a contribution to a solo 401K, but I was planning to calculate that contribution just based on self-employment part of my income. What (if any) retirement vehicle is appropriate for the severance income? I thought I could at least make a $7000 contribution to an old traditional IRA, but Turbotax says I'm ineligible to make a before-tax contribution because my MAGI is too high. Would I be permitted to lump both severance and self-employment income together to calculate a (much higher) contribution limit to the solo 401K?

[MinhT1]

No.

Your solo 401(k) contribution can only be based on your self-employed income.

Please read this IRS document for more information.

[GB2424]

OK, but is there any other option available? It seems like if that severance payment is ineligible for employer 401K, there should be some tax-deferred retirement option

[MinhT1]

There remains a contribution to a Traditional IRA which would allow you to deduct up $6,000 plus $1,000 catch up if you are over.

As you said that you are not covered by the 401(k) at work, you would be eligible if you file Single or if you filed jointly and your spouse is not covered by a retirement plan at work.

Please read this IRS document for more information. 

[dmertz]

Of course if you make a solo 401(k) contribution you would be an active participant in a workplace retirement plan.

Just because a traditional IRA contribution is not deductible does not necessarily mean that making such a contribution would not be beneficial.  Depending on how much you have in traditional IRAs, it might make sense to to a Roth conversion after making a nondeductible traditional IRA contribution.  Remember, the pre-tax retirement contributions are deferred income.  You (or your heirs) will eventually pay taxes on the the pre-tax money (assuming that it does not decline in value due to investment losses).