Solo 401K and IRA

Husband age 68 in 2015 (73 in 2020) Wife age 62 in 2015 (age 67 in 2020). H created a solo 401k in 2015 and reported in
Schedule C profit before his 401k contribution of $ 10,000 each in years 2015 to 2017. The $ 10,000 profit in those years were reduced each year by a $9,000 contribution to his solo 401k. He also made a matching contribution each year on his behalf.
In 2018 and 2019 the business lost $8,000 each year. In 2020 he expects a loss of $12,000

1. Could his business been able to make a 401k contribution in years 2018 and 2019 even though Schedule C showed a loss of $8,000 each year.
2. Can he pay his wife a salary of approx $ 4,000 in 2019. She does phone calls writes checks, makes deposits, reconciles the bank, sets appointments .
3. Therefore can wife set up a Roth IRA in 2019 and she can contribute $ 4,000 for herself?
4. Can he contribute to his Roth IRA in 2019 $ 4,000 also because his wife had $4,000 in W2 wages



  • This post is outside the normal scope of this forum, but I am answering becase of the very serious problems you have that must be addressed immediately.
  • I hope you misspoke when you referred to the Schedule C profit being reduced by the one-participant 401k employee deferral. Employer retirement plan contribtions are not deductible on Schedule C. They are deducted on your personal Form 1040 on the “Self-employed SEP, SIMPLE, and qualified plans” line.
  • If they were in fact deducted on Schedule C reducing bsiness profit. Schedule C was incorrect, Schedule SE was incorrect and SE taxes were significantly underpaid. It will be necessary to file amended returns for years with this profit and still nder the Statute of Limitations (SOL).
  • The bigger problem is that one-participant 401k employee deferrals are limited to self-employed earned income (business profit – 1/2 SE tax). Employer contribtions are limited to (self-employed earned income – employer deferrals) / 2. If the maximum employee deferral was made,  no employer contribtions were allowed. 
  • Any excess 401k employer contribtions can not be removed, must be reported on Form 5330, are subject to a 10% excise tax penalty on the excess contribution balance increased by each year of excess contributions. The excess contribution balance remains until reconciled with available employer contribtion space. There is NO SOL on Form 5330.
  1. Self-employed individual’s employer retirement plan contributions are limited to their self-employed earned income (business profit – 1/2 SE tax). No business profit no contributions. Also, those losses are not deductible on your 1040 unless you have basis in the business. This is limited to investments and/or loans made to the business prior to the losses occuring.
  2.  A sole proprietorship with a history of losses wold not normally be adding new employees. Where is the money to pay this payroll coming from if there are no profits? This begs the question, is this legitmate employment or what it sounds like, a scheme be able to make IRA contributions.
  3. For her to have 2019 W-2 wages, they needed to be paid in 2019. No 2019 W-2 Box 1 wages, no 2019 IRA contribtions.
  4. Even if the other spouse had IRA compensation, a spouse can only use the other spouse’s available IRA compensation which is reduced by any IRA contribtion that other spouse makes.

A little constructive criticism and a suggestion. It is pretty clear from your post that a professional should have been involved from the very beginning. If you made excess employer 401k contributions, I do not believe that you should attempt a DIY solution. You need to contact a professional immediately.



 Comment was about my good friend and long time neighbor.  Did not see his tax return but he indicated therewere other forms, he thinks related to this situation filed.   I will tell him and suggest he sees a professional like you said.  Maybe his return was done correctly, he just did not give me enough details.



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