Q: Contributing to both Solo Roth 401K and Roth IRA w/ only $8k Earned Income
My only source of EARNED income is from self-employment at about $8000 net profit per year. The rest of my income is from SSDI, $28k, and is UNEARNED.
For the year 2019, assuming my business net profit is $8000, can I contribute say $7000 to Solo Roth 401K as well as $6000 to Roth IRA? — i.e. $13,000 combined contributions on only $8000 earned income.
According to a CPA I spoke with, and an Estate Tax Attorney, along with a few people on another forum, they all seemed to think I could.
I just find it unbelievable that I could contribute $13k total on only $8k earned income. But I was told I met the rules and could. It would benefit me greatly if I could because I save over $20k per year, and want more of it going into tax-sheltered Roth accounts instead of regular taxable investment brokerage accounts. But I don’t want to risk paying any penalties for over-contributing.
Permalink Submitted by David Mertz on Fri, 2019-02-08 23:16
The law says only deductible contributions to the solo 401(k) (the amount on 2018 Schedule 1 line 28) reduce net earnings available to contribute to an IRA. Since the Roth 401(k) contribution is not deductible, it does not reduce the net earnings available to contribute to the Roth IRA. This corresponds to the situation where your income is reported on a W-2. The IRS treats the amount in W-2 box 1 (minus any amount in box 11) as compensation that will support an IRA contribution and the amount contributed to the Roth 401(k) plan provided by the employer is not excluded from box 1.
Permalink Submitted by Alan - IRA critic on Fri, 2019-02-08 23:18
Yes, you can because the solo K Roth contribution does not reduce the amount of your net earnings from SE available to be used for a Roth IRA contribution.
Permalink Submitted by Jennifer G on Mon, 2019-02-11 21:59
This is incredibly good news! Later on when I draw on my investments during retirement, I’ll have less taxable income.. which is good because over a certain threshold of taxable income they start taxing social security income as well (so a double whammy on taxes).. this will help keep me below that threshold.
Permalink Submitted by William Tuttle on Mon, 2019-02-11 22:17
Permalink Submitted by Jennifer G on Mon, 2019-02-11 22:55
I didn’t realize there was a self employed health insurance deduction. Is this new? I looked at the old schedule C and don’t see that as a deduction: only business expenses, portion of home, & vehicle mileage / wear & tear. Would these deductions lower my Net Profit and reduce self employment taxes?
Permalink Submitted by William Tuttle on Tue, 2019-02-12 01:48
It is not new, I took it in 1989 and 1990. The self-employed health insurance deduction is not a business deduction. It is a personal deduction. This year it is on the new Schedule 1 Line 29.The new QBI deduction is on Form 1040 Line 9.