IRA and Solo 401k Contributions

[mrtk31]

the IRS uses the term "taxable compensation for the year" so on my tax return is that number the "total income" or is it the "adjusted gross income"

I don't want to get into trouble and contribute too much. All of my income is 1099 income.

thanks for any help!

[VolvoGirl]

For an IRA contribution.  If you only have self-employment income you can only contribute up to your net profit reduced by the deduction allowed for one-half of your self-employment taxes.  But not over the max 7,000.  See IRS publication 590 http://www.irs.gov/pub/irs-pdf/p590a.pdf

So check 1040 Schedule 1 line 15.  You have to deduct that amount from your Schedule C Net Profit.  That will give you the allowed contribution for the 1099NEC income.

[DawnC]

Neither.  Both of those line items can and usually do contain income not considered compensation.    If all of your income comes from self-employment 1099s, your taxable compensation is your business net profit,  Schedule 1, Line 3 less self-employment tax deduction which is on Line 15 of Schedule 1.    TurboTax can calculate your maximum contribution for you.  

Once your self-employment income is entered:

1. In your return, type SEP IRA contributions (use the whole phrase) in the Search box.
2. Select the Jump to link at the top of the search results.
3. This will take you to the Self-Employed Retirement Plans screen.
   • If you get a message that Self-Employed Retirement Plans are only for self-employed individuals, this means that you haven't entered any self-employed income.
4. TurboTax will ask you whether you contributed to different types of retirement plans. Select Yes to Solo or Roth 401k.
5. Check the box to Maximize Contribution to Individual 401k.   
6. Click Continue.

[mrtk31]

thanks for the help, I'm just so confused

I'm using turbotax self employed live, I can't see a formal schedule C.

If you could just help me where to look to find this information on my net earnings.

I also have another expense from a side thing I started that hasn't gotten to the point of earned income yet that is about $7,000 I spent last year that I included on my self employment income/expenses.

I just wish there was a way I could see how much I am allowed to put into IRA/Solo 401k without getting into trouble

[mrtk31]

I just realized I responded and did not notice Dawn's post which I'm reading now

[mrtk31]

thank you so much Dawn!

so if the number is $16,000 that turbotax says my maximum contribution to a solo 401k plan, and I have contributed $6,000 already to a Roth IRA (which comes first in my retirement strategy), then that means I would only have $10,000 possible contribution to my solo 401k plan without getting into trouble?

[DianeW777]

You may not have the current (tax year 2021) allowable limit. 

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

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:
  • $20,500 in 2022 ($19,500 in 2020 and 2021), or $27,000 in 2022 ($26,000 in 2020 and 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.

[mrtk31]

yes I understand how the solo 401k contributions limits work but that is not my question

my question is specifically can my solo 401k contribution + roth ira contrubtion > earned income?

which sounds kind of weird because how can I contribute more than my earned income.

[DianeW777]

No, Solo 401(k) contributions are based net income from self-employment (i.e. you can't contribute more than you make).

• 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: $20,500 in 2022 ($19,500 in 2020 and 2021), or $27,000 in 2022 ($26,000 in 2020 and 2021) if age 50 or over.

[mrtk31]

you answered a question I did not ask

I am NOT asking if I can contribute more than my earned income to my solo 401k

I AM ASKING if my solo 401k contribution + roth ira contribution can be more than  my earned income, because both added together are MORE

[RaifH]

No, if you defer all your self-employment income into a Solo 401(k), you would not show any taxable income for the year. Without any earned income, you cannot contribute to a Roth IRA.

According to the IRS, your contribution limit is the lesser of:

• $6,000 ($7,000 if you are age 50 or older) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or

• Your taxable compensation

[mrtk31]

I should have been more clear.

The solo 401k can have tax deferred contributions and taxable (roth) contributions

The majority of my solo 401k contribution was Roth 401k.

is the answer still "no"?

[AmyC]

If your compensation is below $58,000, you can. Just be sure the  nontaxed portion meets all those separate requirements.* There  are income limitations to consider. and can be viewed in 401(k) and Profit-Sharing Plan Contribution Limits. As to contributions, it states: 

The annual additions paid to a participant’s account cannot exceed the lesser of:

• 100% of the participant's compensation, or
• $58,000 ($64,500 including catch-up contributions) for 2021;  $57,000 ($63,500 including catch-up contributions) for 2020.

• However, an employer’s deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to eligible employees participating in the plan (see Employer Deduction in Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).

  There are separate, smaller limits for SIMPLE 401(k) plans.

Related:

• *   Retirement Topics - Contributions
• Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
• About Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)

[mrtk31]

ok so now we have a "yes" thank you for that

is there a reason the irs allows me to contribute money to my retirement accounts (solo roth 401k and roth ira) that exceeds the money I made for the year?

how is that even possible?

should I just accept that the irs is a bunch of idiots and can't do math and forget about it?

also why did 3 people say "no" and now you say "yes" I'm beginning to question the "expert" tag applied to your guys names on here

[mrtk31]

bump