Excess Contributions to an i401k including Roth i401k (solo 401k)

Submitted by Herbert Goldman on Fri, 2022-06-17 22:15

Sarah Brenner, JD, recently discussed excess IRA contributions in The Slott Report, dated June 6, 2022.

Do the same rules regarding earned income apply for an i401k (including Roth i401K)?

Many advisors recommend making retirement contributions at the start of the year in January, but particularly in the COVID era, by the end of the year, a sole proprietor with a solo 401K may have sustained a loss on their Schedule C. If the same rules apply as discussed in the June 6, 2022, issue of The Slott Report, they might have an excess contribution in both their IRA and i401k.

Sarah Brenner, JD, also stated, “While you can use a spouse’s taxable compensation to fund your IRA, you may not use many other different income sources including Social Security, pension, rental, and investment income.” Ed Slott strongly recommends doing Roth conversions. Would the amount converted (reported as a distribution on a 1099-R) be considered earned income?



Submitted by Alan - IRA critic on Fri, 2022-06-17 22:55

  • A distribution from a retirement plan including a conversion is not treated as earned income and cannot be used to fund a regular IRA contribution. If there is a net loss on Sch C, an IRA contribution cannot be made unless there is wage income in addition to the Sch C loss. 
  • Excess amounts contributed to a 401k or Roth 401k require different treatment than IRA excess contributions. Such excess amounts may be excess elective deferrals or excess employer contributions which must be corrected with different procedures and different deadlines. Return of excess deferrals for 2021 should have been returned with allocated earnings (or net of allocated losses) by 4/15/2022. If not done, these amounts will be taxable in 2021 (but not the Roth deferral), and again when such amounts are eventually distributed.


Submitted by Herbert Goldman on Fri, 2022-06-17 23:29

Can contributions be made to an i401k (including a Roth i401k) if there is a net loss on the Schedule C?



Submitted by David Mertz on Sat, 2022-06-18 00:24

No.  With no net profit the sole proprietor has no compensation from which to make an individual 401(k) contribution.  The contribution cannot exceed net earnings.  Net earnings are net profit minus the deductible portion of self-employment taxes.



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